Valuation Of Farm Freehold Property
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27 February 2012
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
seriously understated. With
farm values of over 100% from 2005 to 2010 and a large increase in
the previous decades, in some instances this could be as much as
£million. It is
quite normal for a
freehold farm to have been inherited or purchased at say £2,000 in the
and to be worth over £2 million today.
addition, the improvements to freehold property can look out of balance
of this historical difference.
accounts should be prepared on the historical cost basis.
Reporting Standard 15
(FRS15) allows valuations to be brought into the accounts instead of
certain circumstances. There
who would consider that to show the freehold property at valuation in
accounts would be so much more reflective of the “true and fair
many farms wanting to borrow money for
expansion, unless the freehold property is included at market value the
is a distorted and strange looking balance sheet.
to a “class of assets”
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
and machinery; and
revalued always revalued
consideration is then to the future - what happens
once a revaluation has taken place? Do
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
years. This can be
quite an onerous and
expensive operation. Many
businesses would like their accounts to show a true and fair view but
cautious about the cost of having to revalue the freehold property on a
can be argued that most farms need valuations for
other purposes, e.g. to obtain borrowings secured on freehold property
accurate capital tax planning moving forward, e.g. inheritance tax
gains tax planning. To
revaluation policy on the class of fixed assets “land and buildings” is
something that most farming enterprises will have to consider.
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
areas of the farm, for example where there are both ongoing and
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
as it is unrecognised at the balance sheet date.
tax is exceptionally complicated – the farm
values are high and the risks of claims for tax reliefs being upheld is
every five years
(with interim values at three years) could have the advantage for the
adviser of flagging up concerns regarding tax risk.
various inheritance tax, capital gains and income
tax purposes, most farming businesses are run as a
partnership. The Companies Act
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
values decline but again this could be a strong reason for FRS15
freehold property to be considered.
the recent increases in farmland values, the need
for borrowings to expand the farming enterprises and the need for
freehold property values, FRS15 will have to be considered by most
About the Author
Supplied by Julie
Butler F.C.A. Butler
& Co, Bennett House,
The Dean, Alresford, Hampshire, SO24 9BH.
Tel: 01962 735544. Email; firstname.lastname@example.org,
the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine
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