Back to the future: why are we still rebasing to 1982?

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Why is it that we are still looking back over 25 years and having to calculate the market value for assets as at 31 March 1982?

When disposing of a capital asset acquired before 1 April 1982 and disposed of after 5 April 1988, there is an option to either use the original cost or the market value of the asset on 31 March 1982. In most cases the latter value will produce the smaller gain or larger loss and is therefore the practical option. This rebasing is achieved by deeming assets to have been disposed of and immediately reacquired by their owner on that date, at their then market value. This sounds simple enough.

For companies that hold multiple land and buildings the irrevocable election in the Chargeable Gains Act 1992 is most likely to be used. This allows just one calculation with the value of the asset as at 31 March 1982 in place of original cost and applies to all disposals henceforth. Rather than going through the lengthy process of agreeing a March 1982 value each time a property is sold, a company can use HMRC’s pre-disposal Portfolio Valuation Scheme (providing certain conditions are met). This allows March 1982 values to be agreed on a portfolio which contains all relevant land and buildings held by a company. In practise, when rebasing, a number of complexities and issue can arise which need identifying and managing.

Once the entire portfolio is submitted to your Inspector it will be referred to the Valuation Office Agency (VOA) who will pass it to the Land Portfolio Valuation Unit (LPVU). For every property in the portfolio the full address and postcode, a description of the property, its use in 1982, the interest held in the property as at 31 March 1982 and a professional valuation of the property is required. As you can see, this is one area that falls in between surveying and tax.

If independent valuations were carried out, say for example in 1981, it is up to the discretion of the LPVU whether these are accepted for entry into the scheme as they were not undertaken expressly for the rebasing purpose. We have found HMRC will place more reliance on a current professional valuation undertaken in accordance with the RICS Red Book (backdated to March 1982) which provides sufficient detail than valuations undertaken closer to this time. This is despite the detailed look at land and buildings required that will no doubt have undergone many changes and may have been demolished altogether.

A sample of properties will be chosen by the LPVU using their stratified sampling approach. This approach takes a percentage of the portfolio, divides this sample into sub samples with similar proportions as the groups in the population e.g. value band, location and tenure, then selects properties at random from within each group. This method is used by the LPVU so they can ensure that a fair cross section of values, locations and property types are reviewed which are generally representative of the rest of the portfolio. They also have a historic policy of looking at all properties with a submitted value of over £1 million. You should be aware however that this can create a frustrating bias in the sample. The sample properties are individually passed to the DV local to the area and further information may be required from the taxpayer.

In the absence of a professional RICS compliant calculation, or even with it (!) the local DV will often calculate a March 1982 value. There may be large discrepancies between the DV values and the submitted values which can often be rationalised and eliminated by comparing assumptions and other available evidence. This can be discussed property-by-property however there is the possibility that the sample could be looked at in chunks. Once the sample values have been agreed, thought must also be put into how this percentage change is to be extrapolated across the portfolio.

Although a large amount of effort is required to submit correct valuations, once this has been done the process to agree these values will be much shorter than without correct information from the start.

Bourne Business Consulting LLP, based in London, was named Best Tax Team in a Boutique Firm as part of the Lexis Nexis Taxation Awards 2007. For more information, contact Bourne on 0207 960 2730 or visit www.bournebc.com