Property held in a limited company – is it trading or is it investment property?

Nick Haines from Hazlewoods, a Gloucestershire-based firm of Business Advisers and Chartered Accountants, tackles this question commonly posed by property developers and investors.

“At the end of the day it comes down to intention. What are your plans for this property? Do you intend to develop it to sell in the near future, with a view to making a profit or hold on to it long term to generate a rental income and/or for capital appreciation?,” explains Nick Haines, head of Hazlewoods tax and property teams. “If the former then it is trading, the latter, it is an investment.”

The UK accounting standard FRS 102 defines ‘investment property’ as:

Property (land or a building, part of a building, or both) held by the owner, or by the lessee under a finance lease, to earn rentals or for capital appreciation or both, rather than for:

1. use in the production or supply of goods or services, or for administrative purposes; or

2. sale in the ordinary course of business.

If you are developing property for resale, with the intention to retain part of the development as a long-term investment, make that decision at the outset, identify those properties for retention and always document your intention.

It is important to get this right from the start, changing your mind somewhere down the line can have significant tax consequences. We understand that this cannot always be avoided but please be aware of the tax implications of doing so.

From an accounting perspective, properties held for development and re-sale should be shown as development ‘stock and work in progress’. However, if the property is held for investment, include it in your list of fixed assets. At each year-end, investment property is reported at its ‘fair value’ (this is the amount for which the property could be sold, between willing parties in an arm’s length transaction). If the fair value of the property cannot be reliably measured without undue cost or effort to the company, an exemption is available, and the property is reported at cost. However, please note that, for periods beginning on or after 1 January 2019, this exemption has been withdrawn from the legislation leaving companies with the annual challenge of determining the fair value of investment property.