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HMRC internal manual

Guidance on Real Estate Investment Trusts

Conditions and Tests: Tax-exempt business Conditions: Condition 2: valuation of assets


For the purposes of Tax-exempt business Condition 2 and Balance of Business Condition2, the company has to value its assets and allocate them to the property rental businessor other activities of the company. The same rules for valuation, set out in section107(6) FA 2006, apply to both.

Use of International Accounting Standards (IAS)

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

No account is taken of liabilities secured either generally or specifically against any ofthe assets. For example, if a property that could be sold for £1,000 has a mortgagesecured against it of £300, the value for Tax-exempt business Condition 2 is £1,000. Ifa creditor has a £500 floating charge on the assets of the group, that too is ignored forthis purpose.

Below are very brief details on the standards most likely to be used. In cases ofdifficulty in applying the standards, inspectors should in the first instance consulttheir local accountant. If advice on the value of an asset is required, see CGM16200onwards.

IAS 40 – investment property

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

Under IAS 40, investment property is valued using a fair value model. Fair value isthe amount for which the asset could be exchanged between knowledgeable, willing partiesin 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 ofgoods or services, for rental to others, or for administrative purposes. It applies toproperty that is not investment property as defined in IAS 40, such as offices used by thecompany 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. Italso applies to the valuation to ‘owner-occupied’ property, since these are also excludedfrom IAS 40. See GREIT01030 for more detail onowner-occupied’.

IAS 16 also applies to plant and machinery.

IAS 39 – financial instruments

The valuation of stocks, shares, derivative contracts, debt, securities etc is dealtwith in IAS 39. This sets out four ways to value financial instruments. A briefdescription of the application of IAS 39 can be found in CFM16025.