IFM22040 | Real Estate Investment Trust : Conditions And Tests: The Property Rental Business Condition: Condition B: Valuation of Assets : CTA2010/S529(2)

For the purposes of property rental business condition B and balance of business condition B the company has to value its assets and allocate them to the property rental business or other activities of the company or group. The same rules for valuation, set out in CTA2010/S529(4), apply to both.

Use of International Accounting Standards (IAS)

The assets are valued using International Accounting Standards (IAS). If the relevant accounting standard gives a choice between cost basis and fair value for an asset, fair value must be used. If however IAS prescribes cost basis, fair value cannot be used instead for the asset test.

No account is taken of liabilities secured either generally or specifically against any of the assets. For example, if a property that could be sold for £1,000 has a mortgage secured against it of £300, the value for Property rental business Condition B is £1,000. If a creditor has a £500 floating charge on the assets of the group, that too is ignored for this purpose.

Below are very brief details on the standards most likely to be used. In cases of difficulty in applying the standards, inspectors should in the first instance consult their HMRC Compliance Accountant. If advice on the value of an asset is required, see CG16200C.

IAS 40 - investment property

IAS 40 applies to investment property. This is defined as property that is held to earn rentals or for capital appreciation or both, but excluding property that is used for the production or supply of goods or services or administrative purposes and any property held for sale in the ordinary course of business.

Under IAS 40, investment property is valued using a fair value model. Fair value is the amount for which the asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.

This standard will usually apply to property involved in the property rental business.

IAS 16 - property, plant and equipment

This standard applies to tangible assets that are used in the production or supply of goods or services, for rental to others, or for administrative purposes. It applies to property that is not investment property as defined in IAS 40, such as offices used by the company for administrating their business and hotels owned and operated by the company.

IAS 16 gives a choice between using the fair value model (as above) and cost basis. It also applies to the valuation of 'owner-occupied' property, since these are also excluded from IAS 40. See IFM21030 for more detail on owner-occupied'.

IAS 16 also applies to plant and machinery.

IAS 39 - financial instruments

The valuation of stocks, shares, derivative contracts, debt, securities etc is dealt with in IAS 39. This sets out four ways to value financial instruments. A brief description of the application of IAS 39 can be found in CFM21510.