As the property in question is not for sale, should the cost of that valuation be disregarded and just posted to the P&L? Or is there any validity in the argument that fair price can only be determind after deduction of all costs (including the valuation) and therefore the valuation cost should be deducted from the overall value?
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It's a revenue expense.
There is no validity in the argument that you need to incur valuation costs to realise the value of a property. You realise the value by offering it for sale and accepting the best offer.
Really?
"For sale - 6-bedroom, 3 bath, Victorian detached house set in 1.5 acres of garden. Price - your best offer"
OK - I agree that the incurring of costs may not be a prerequisite, as the seller may already have a value in mind.
To answer the OP, fees for revaluation of investment properties for accounts purposes are normally allowed as a P&L deduction.
Normally but not always - presumably if the valuation is for the purpose of a sale, rather than for the business (as usual, we are not told), it's a capital rather than a revenue item.
Is that not what I said - if the valuation is for the purposes of the accounts then, by definition, it is not for the purposes of a sale. And the OP did say that the property in question is not being sold. By inference, the valuation must be for some other purpose - I've made the bold assumption that it's for accounts purposes. (And the title does refer to a "REvaluation", a term commonly used in the context of preparing accounts and less commonly used when discussing a sale.)
The property has a value. The act of valuing simply determines what that value is. The value itself doesn't change because of the act of valuing it. No valuer says "This property was worth £500,000, but by getting me in to value it you've knocked that down to £495,000".
So john is indeed correct that the value COULD be determined by simply offering it for sale and accepting best offer. Theoretically rival buyers will keep bidding up until the actual property value is reached. The reason why you don't generally do that is that in real life markets are not perfectly efficient. (i.e. you'd risk bidding stopping below market value because buyers that would be willing to pay more just aren't aware the property is for sale)
The reason why you don't generally do that is that you don't want to sell and need a valuation for another purpose. I find it an intriguing notion (observation?) that, if you left it to the market to determine the market value, the answer you'd get would be wrong. (I'm not saying I disagree; just that it hadn't occurred to me and I'm intrigued.)
It wouldn't be wrong. The actual value obtained might be *different* from the value calculated on a hypothetical basis (the "market value"). But "different" is not the same as "wrong".
What is intriguing to me (and I guess we're all talking about the same thing, albeit in slightly different terms) is that if the market is left to determine the real value, that real value may be different from the market value (as defined in tax legislation).
I find it an intriguing notion (observation?) that, if you left it to the market to determine the market value, the answer you'd get would be wrong. (I'm not saying I disagree; just that it hadn't occurred to me and I'm intrigued.)The correct market value is what you should be able to sell it for in a perfect market.
In saying that you might not get that from simply leaving it to the market, I am simply pointing out the real world is not perfect. You can't guarantee reaching ever potential purchaser, and so you can't guarantee the value being bid up to whatever the market as a whole will bear.
Equally, you can't guarantee that someone would bid over and above what the market as a whole would bear. In other words, if 9,999,999 people believe the value to be, and offer, £565,000 and 1 (foolish) person offers £620,000, what is the market value?
Whatever they could sell it for the day after they purchased.
You do get this with "dream" homes, people can fall in love with house/location/street and if unique/difficult to replicate it becomes a must have.
We have friends who years ago kept missing out on a type of property in a particular area, back then our market was driven on offers over, after about 4 abortive attempts to purchase for the next one it was just, yes, we are getting this one, our offer will blow the opposition out of the water.
So they got it, for a few years if they had sold they likely would not get their money back, now, it will be worth 2-3 times what they paid, if you have no intention of selling it really does not matter.
I suspect our next house purchase could be like this, it might be (I hope it will be) our last, when we buy if it is a property we must have/cannot replicate and there is a closing date and bidding war we will just go for it-quality of life beats money, the foolish tag only relates to the party if one's house is an investment, if it becomes something to be held forever, value/ price may become irrelevant.
All makes sense - my use of 'foolish' was perhaps ill-advised. In my example, perhaps the purchaser grew up in the property as a child and was determined that his own children should have it. Perhaps he was the only one in a million to spot a glimpse of the gold bars hidden in the water tank. But now we're straying into the territory of the special purchaser.
The point is that 'market value', to a tax adviser, has a particular meaning and need bear no relation whatsoever to the true value of the property to the actual purchaser (or seller) which value should probably more correctly be described as fair value.
Perhaps he was the only one in a million....
One in ten million, if I've followed your numbers correctly. You're the one in a million (though, it seems, not the only pedant to venture out on a Friday).
But now we're straying into the territory of the special purchaser.
Precisely. For anyone to want to pay significantly more than any other purchaser, they must have a special reason for doing so. If you have to introduce a deliberate distortion like this to make your point then you're just arguing for the sake of arguing.
I concur- discussing matters on here at least takes my mind of the heat, as I have just spent the last 40 minutes loading a van with furniture any distraction at my age from the discomfort is welcome.
It depends on when you need to establish MV (and what for). There are different (tax) definitions of MV; the one I know best is the TCGA one (s272) - what the assets "might reasonably be expected to fetch". As the day for exchanging drew near, I think you could say that the property might reasonable be expected to fetch £620,000; the day after, as DJKL says, who knows?
Knowing the point at which the value is needed can be vital, for example (varying the asset but not the figures) to demonstrate the sale doesn't give rise to a tax charge under s446X ITEPA.
Why £620k? That presumes that one knows about the existence of the special purchaser. The s272 definition involves a hypothetical normal seller and a hypothetical normal purchaser. If there is the potential for a special purchaser then customary methodology requires (or at least it used to require) the market value otherwise determined to be increased by only £1 (since, all other things being equal, that special purchaser would need to offer only £1 more than anyone else to secure the deal).
I was extending your example (as had DJKL, without attracting comment), wherein
to the situation wherein the vendor accepted the offer and the sale was agreed (subject to contract)....1 (foolish) person offers £620,000...
The OMV as defined by s272 seems to me never to be less, at the point of sale, than the actual sale consideration, and could perhaps be more; the sale having been made, as DJKL said, the MV on the next day might well be less than the consideration agreed the day before.
But ... if the offer has been accepted you no longer have a hypothetical purchaser and hypothetical seller.
Again, I think we're broadly on the same page although one is reading from the top, the other from the bottom. In my example, I would accept that the market value on the day after (as defined for tax purposes) probably would be less than the agreed consideration. I would also contend that the market value (as defined for tax purposes) was that same lower figure on the day before the sale was agreed.
But ... if the offer has been accepted you no longer have a hypothetical purchaser and hypothetical seller.
True, but you may still need to quantify MV, for tax, even at the point of sale. I cited s446X, which I recall [of course I should check... but look at the weather!] uses the CGT definition. What I'm positing is that a genuine arm's length transaction [however 'foolish' the (unconnected) buyer] never gives a price in excess of (s272) market value; Parliament has defined the expression in such a way that the s272 value will always be equal to or more than the price obtained, at the point at which that price is obtained.
My contention was (and is) that a sale on the open market provides a market value as defined by s272.
s446X(b)
Discuss
Why? I know I referred to s446X, but that was as an example of when you may need to establish MV at the point of sale – s446X is of course irrelevant to the interpretation of s272. That s446 can impose a tax charge is obvious, but not, never and no way (I contend) on an open market sale to an unconnected party.
Going back to your
I would also contend that the market value (as defined for tax purposes) was that same lower figure on the day before the sale was agreed.
That same figure? Really? And what about the day between the day before and the day after?
Or of course if property is what you do for a living you do just tend to acquire a feel for pricing, especially re the assets you already own. Part and parcel of that is you tend to watch and observe the prices of those properties around you, you are subscribed with so many agents you have a constant flow of particulars/data into your inbox.
And what is value when selling, especially commercial, rather than in the abstract it is often smelling out how deep the pockets are of the person you are negotiating with , discerning its value to him/her, holding your line, prodding him upwards, certainly with more expensive units/sites price is not led by the vendor re his marketing, POA is often used/subject to negotiation etc rather than named price.
Hate to say professional valuations only get instructed by us when needed/demanded by a bank, certainly with commercial property they can often be a nonsense and anyone who bases their subsequent marketing on them is possibly doing themselves a huge disservice.
As an example we have four units in one street, two ground floor two first, all are offices. The professional valuation for the four may in theory be correct, based on current uses/leases, red book done last year for bank has to conform with RICS practice, but reality, the real world, I know I can get a very simple residential planning for the two upper units (no ifs/buts, half the street and rest of the stairs is residential) and then sell the pair of them as is, for the price the four are in the red book valuation, the valuation by the pros, based on approved methodology per RICS, is out by 100%.
As an example we have four units in one street, two ground floor two first, all are offices. The professional valuation for the four may in theory be correct, based on current uses/leases, red book done last year for bank has to conform with RICS practice, but reality, the real world, I know I can get a very simple residential planning for the two upper units (no ifs/buts, half the street and rest of the stairs is residential) and then sell the pair of them as is, for the price the four are in the red book valuation, the valuation by the pros, based on approved methodology per RICS, is out by 100%.
But surely in that example the only reason that the valuation is "out" is because it hasn't been updated to reflect the planning consent? Any valuation that doesn't reflect current planning permissions is almost certain to be "incorrect". So I'm not sure what your point is.
The planning consent is not magic, nor do we have it, what we know is if we ask for it we will get it.
What I am saying is professional valuations rarely reflect different use and in reality are often no better at establishing true value to be realised than chicken innards, they do not say what would actually be paid. I appreciate slightly different re residential property, wider set of buyers and market has a better feel (there are more comparables as metrics) so professional valuations are not so wide of reality.
You often do not even need to get the planning to get the price. Where we have made most of our big profits over the years is buying the situations where the party marketing actually does not know what they have got so we have bought, whilst formal valuation needs to follow due process the real market (actual money) does not.
We have another site which it is apparent to anyone with a brain could be housing, red book valuation even mentions it in the narrative, yet the valuation given, for the red book, is probably about 45% of what we could sell the site for housing, in fact doubt we would need planning to sell, could likely market it and would have a queue of builders wanting to buy without planning-my point is therefore that one ought not to rely in any shape or form on a Red Book valuation re commercial property unless it is the most simple and boring bit of real estate known to mankind.
Got you. I (mis)read your post as saying that you would get planning consent and then sell. Everything else I understand and fully agree with.