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Investment Properties – Tax and Accounting Top Tips

Accounting in Corporate Structures

Since the introduction of the new financial reporting standard FRS102 in 2015 we have found the accounting treatment of Investment Properties are not being dealt with correctly in many instances. Here are some basic rules to follow when accounting for your investment property this year.

You are required to use fair value unless fair value measurement would present undue cost or effort, in which case cost is permitted. It would only be in very unusual circumstances that property could not be revalued due to the cost or effort of acquiring the valuation.

Revaluations are accounted for through the profit and loss account.

Deferred tax is required on all revaluations. Deferred tax represents the future tax consequences of transactions and events recognised in the financial statements of the current and previous period.

Revaluations may result in either a deferred tax asset (in the case of a revaluation loss) or a deferred tax liability (in the case of a revaluation gain). Before providing for deferred tax asset there would need to be substantial evidence to prove that you can realise the capital loss in the future.

The financial treatment of investment properties in financial statements has consequences in the hands of third party users be it bankers, private capital houses, third party investors or Revenue.

Taxation in Corporate Structures

A capital goods scheme record (CGS) is required for all commercial and industrial properties that are registered for VAT. Every property must have this 20-year VAT passport, it is a requirement by Revenue and will be required in the event of sale. Care needs to be taken when leasing to non-VAT registered entities by a VAT registered entity. If VAT is not charged then this will most likely trigger a VAT repayment of some or all of the VAT originally claimed on the purchase or refurbishment of the building.

Corporation tax of 25% is applied on all rental profits in a company structure. Undistributed remaining profits after corporation tax is taxed with a further Surcharge of 20% if not distributed within 18 month from year end. There may be ways of dealing with this surcharge in certain circumstances depending on one’s structure.

Only costs that are directly incurred in the management and maintenance of the properties are allowed as deductions for corporation tax purposes. As a rule of thumb Revenue will allow 15% of Gross Rental income to be treated as salary in the normal course of business.

For more information on the taxation and accounting treatments of investment properties please contact Pat Sutton, or 045 530777