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Property held as stock not fixed asset

We have a potential new client where property is held as stock on the balance sheet.

The property isn't being developed to be sold - it has been improved and is now rented out. 

If the property is transfeered to fixed assets, this will create an immediate tax charge. Is there a way to avoid this? Can the property be kept as 'stock' and still be rented out?

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By Ruddles
17th Jan 2018 20:38

It is what it is. If there’s no intention to develop and sell, then it’s likely to be classed as an investment asset. If that gives rise to a tax charge, tough.

If on the other hand the decision not to develop is only temporary and it is being rented in the interim then arguably it might be possible to keep it in stock.

I would be asking the directors, without leading them, what their intentions are. Their response will dictate the accounting - and tax -treatment. Though I’d not be surprised in the slightest if they were to change their response once the tax implications had been explained. Key point is to make them aware of the risks of incorrect treatment.

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17th Jan 2018 21:25

Can you run that by me again, please.

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to andy.partridge
17th Jan 2018 23:29

On the face of it, it should be an investment property with the tax charge you mention.

HOWEVER, if the property is TEMPORARILY being let whilst the directors look for capital investment/housing market to rise so they get better gains etc etc etc, and their ‘real’ intention is to develop & sell, it can still be classed as stock.

We had quite a few clients at a firm I used to work at who started letting their developed/developing properties during the property crash, who after being explained the rules decided their intention was still to sell “any day now”. It has to be said, suprisingly, they were explained & asked multiple times, with specific cash examples, before they agreed our treatment was correct (I mean made their strategic decision).

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18th Jan 2018 11:25

I agree with the above comments, whether it is stock or investment property is a matter of fact based upon how the carrying value is intended to be recovered - by retention for use in the business or rental income, or through a sale.

If through rental income (unless temporarily until a buyer is found) then it is an investment property, and an appropriation arises. Appropriations to or from trading stock are deemed to take place at market value, so that a trading profit/capital gain arise. Where it is an appropriation TO trading stock, the capital gain can be deferred by election, but there is no corresponding election available for appropriations FROM stock, so a taxable trading profit arises.

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By johnt27
18th Jan 2018 12:40

Agree with all the other comments made.

The only other thing I've experienced, in a similar situation, was when HMRC opened an investigation and challenged the client to demonstrate how their properties held in stock (but being "temporarily" rented) were being actively marketed and if they weren't being actively marketed how the directors had assessed current market conditions to justify avoiding making losses.

As you can imagine in your typical OMB the directors managed to (miraculously) locate historical meeting minutes which addressed HMRC's queries.

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