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Accounting & Tax Treatment, rented property

Investment Property under FRS102 1a?

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I’ve got myself in an accounting / tax tangle and would greatly appreciate some input!

I’ve a client who has acquired a property on a 10 year operating lease. They are renovating the property and converting into separate units which they will sub let. They will not occupy the building themselves.

Proposal is FRS102 1a, but no accounts filed yet.

Should we should account for the lease as investment property, discounting for present value etc, and show on the balance sheet now for the full 10 years (discounted)? Any refurbishment costs to convert the building, also shown as additions to investment property.

Asset and accompanying creditor then written down over the 10 years. Will claim tax allowances on integral features, and will look at SBA as well.

No rent charge ever shown in the P&L on this basis? Therefore no CT deduction for the rent they are paying?

Is there an option to treat any other way - just showing improvements to property as capital, and expensing the rent as a P&L item, therefore making the rent tax deductible, given it’s an operating lease?

What if they adopt FRS105? They are eligible, and how would this change the accounting and tax treatment?

Managed to get myself tangled up here!!!

Replies (5)

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Hallerud at Easter
By DJKL
15th May 2020 09:33

What obligation do they have to the landlord to do these works to the property , are they obliged to do these in terms of the lease and if they are then do the works go beyond what would be classed as repairs if they had been done by the landlord?

Does property need returned to original state at end of the ten years when handed back to the landlord, if so, what will this likely cost?

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Replying to DJKL:
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By SimonStone
15th May 2020 19:33

No obligation to do any works, and would not fall under scope of repairs required by landlord - the landlord simply would not do anything.

Cost to return to original state would be negligible, the building is pretty much a shell and current state could be easily restored with a big enough sledge hammer!

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Replying to SimonStone:
Hallerud at Easter
By DJKL
15th May 2020 20:59

Are they connected (Landlord and tenant) is then my first thought?

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Hallerud at Easter
By DJKL
15th May 2020 09:42

16.3

"A property interest that is held by a lessee under an operating lease may be classified
and accounted for as investment property using this section if, and only if, the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest on an on-going basis"

Seems to be the "may" in line one makes the treatment non prescriptive.

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Replying to DJKL:
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By SimonStone
15th May 2020 19:31

That's what sent me off on a bit of a tangent. May implies they don't have to - and it also goes on to mention 'undue cost or effort' , which is also quite subjective!

The client doesn't want to bring the lease payments onto the balance sheet, would rather write them off as incurred, and I can't see anything to dissuade them.....

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