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Valuation Of Farm Freehold Property

 By

Julie Butler - Expert Author

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27 February 2012

Many farms and estates were purchased or inherited several decades ago.  As a result the figure used for the freehold property shown on numerous balance sheets is seriously understated.  With increases in farm values of over 100% from 2005 to 2010 and a large increase in values over the previous decades, in some instances this could be as much as several £million.  It is quite normal for a freehold farm to have been inherited or purchased at say £2,000 in the 1970s and to be worth over £2 million today.  In addition, the improvements to freehold property can look out of balance because of this historical difference.

FRS15

Most UK accounts should be prepared on the historical cost basis.  However, Financial Reporting Standard 15 (FRS15) allows valuations to be brought into the accounts instead of cost in certain circumstances.  There are many who would consider that to show the freehold property at valuation in the accounts would be so much more reflective of the “true and fair position”.  With many farms wanting to borrow money for expansion, unless the freehold property is included at market value the result is a distorted and strange looking balance sheet.

Restricted to a “class of assets”

The rules of FRS15 allow for revaluations but they must be in respect of a “class of assets”.  The result is that if some of the freehold property is to be revalued, then this policy must be applied to all the freehold property included in the business accounts without exception.  Also the notes to the accounts should be clearly drafted showing that the accounting policy has changed.  The separate classes of tangible fixed assets are:

a)      land and buildings;

b)      plant and machinery; and

c)      fixtures, fittings and equipment

Once revalued always revalued

The consideration is then to the future - what happens once a revaluation has taken place?  Do a few more decades go past without valuing it again?  The answer is no.  Under FRS15 (which was introduced in 1999) there should be a valuation at least every 5 years with an interim valuation after 3 years.  This can be quite an onerous and expensive operation.  Many farming businesses would like their accounts to show a true and fair view but are very cautious about the cost of having to revalue the freehold property on a regular basis.

It can be argued that most farms need valuations for other purposes, e.g. to obtain borrowings secured on freehold property and for accurate capital tax planning moving forward, e.g. inheritance tax planning, capital gains tax planning.  To operate a revaluation policy on the class of fixed assets “land and buildings” is something that most farming enterprises will have to consider.

A farm revaluation is not something that can be undertaken lightly.  There are a lot of complex issues and it can be difficult to arrive at market value on certain areas of the farm, for example where there are both ongoing and potential planning applications, and hope value (the difference between market value and agricultural value under section 115) to consider.  The revaluation profit should not be recognised in the profit and loss account but in a separate revaluation reserve as it is unrecognised at the balance sheet date.

Tax planning considerations

Farm tax is exceptionally complicated – the farm values are high and the risks of claims for tax reliefs being upheld is a real worry.  Revaluations every five years (with interim values at three years) could have the advantage for the tax adviser of flagging up concerns regarding tax risk.

The non-corporate entity

For various inheritance tax, capital gains and income tax purposes, most farming businesses are run as a partnership.  The Companies Act disclosure guidelines therefore do not strictly apply but should be followed.  With the current fashion for more corporate partners the disclosure consideration would be of more pertinence.  Problems could arise if freehold property values decline but again this could be a strong reason for FRS15 guidelines on freehold property to be considered.

Summary

With the recent increases in farmland values, the need for borrowings to expand the farming enterprises and the need for “fair” freehold property values, FRS15 will have to be considered by most farms.


About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email; j.butler@butler-co.co.uk, Website; www.butler-co.co.uk

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540 and Stanley: Taxation of Farmers and Landowners (LexisNexis)



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Article Published/Sorted/Amended on Scopulus 2012-07-13 14:45:00 in Tax Articles

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