Tax Charge for Revaluation & Reclassification of Assets

Jenny Chamberlain

We have had some property held in our stock account for the last twelve months and have now been told that this has to be transferred to the asset account. On doing so the property has to be revalued which is a substantial increase and I am being told that this will give rise to a tax charge.

I have only ever dealt with revaluations in the asset account before and have never had to move something from stock. If somebody could please explain how the tax charge arises I would be grateful.

K H

You haven't explained if this is a limited company .

Firstly I am surprised that a property has increased in value in the last year but if this is the case the scenario is probably as follows:

If it is held as stock in the P&L Account then any increase in its value will be taxable as trading profits (credit sales debit property investment).

The asset will then be in the Balance Sheet as an Asset and then subject to CGT if it is ever sold (the plus side is that its base value for CGT will be higher) but i would be asking questions why this course of action is being taken as paying tax now would seem quite a silly thing to do.

It may be that HMRC are insisting on it being classified as an asset.

Of course, if the property was bought in the same accounting year there would be no need to revalue it, just tranfer it at cost to the assets account.

I hope this helps

Jenny Chamberlain

Thank you for that, Yes it is a limited company. The property was bought at a bargain!!! I don't know the reason why it was in stock in the first place just that the accountants are now telling us that it has to be reclassified. The company never revalues any of its assets to fair value they usually keep everything at historic costs and as such has a qualified audit report each year, but they are not bothered about that. This is why I was surprised these are going to be reclassified and revalued and why they would incur a tax charge now.

I have only been here a short time and theory is great but no substitute for real life experiences!!

K H

If they always value assets at historic cost why would they transfer it at a more valuable figure bearing in mind they have a qualified audit report?.
Doesn't make sense, and i'm sure when they see the tax implications they will think so too.

In any case can they not persuade their auditors that it is stock by trying to sell it for a short period and then take it off the market when it hasn't sold?