Many UK property investment companies are surprised to learn that an increase in the value of their investment property may affect their financial statements even though the property has not been sold.

Under FRS 102, investment properties are generally measured at fair value, meaning unrealised gains and losses are recognised in the profit and loss account each year. However, these gains are normally not immediately taxable, resulting in deferred tax implications.

This article explains the accounting treatment, corporation tax position, and deferred tax consequences.

What is an Investment Property?

An investment property is land or a building held to:

• earn rental income;

• benefit from capital appreciation; or

• both.

Examples include:

• Buy-to-let residential properties

• Commercial properties rented to third parties

• Office buildings held for investment purposes

Investment properties are accounted for under Section 16 of FRS 102.

Properties occupied by the company for its own business are not investment properties and follow different accounting rules.

Is Fair Value Measurement Mandatory?

In most cases, yes.

FRS 102 requires investment property to be measured at fair value at each reporting date, provided the fair value can be measured reliably without undue cost or effort.

If fair value cannot be measured reliably, the property may instead be measured using the cost model.

Fortunately, for most UK residential and commercial properties, fair value can usually be determined using market evidence or professional valuation.

Example

A company purchases an investment property for £300,000 on 17 July 2025.

At the year end (30 September 2025), the directors determine that the fair value has increased to £310,000.

The accounting entry is:

Debit
Investment Property £10,000

Credit
Fair Value Gain (Profit and Loss) £10,000

The balance sheet will show the investment property at £310,000.

Does the Company Pay Corporation Tax on the £10,000 Gain?

No.

Although the gain appears in the financial statements, it is generally not taxable until the property is sold.

The corporation tax computation should therefore remove the unrealised fair value gain.

For example:

Accounting profit before tax:

• Rental profit £20,000

• Fair value gain £10,000

Accounting profit:
£30,000

Corporation tax computation:

Accounting profit £30,000

Less:
Unrealised fair value gain (£10,000)

Taxable profit:
£20,000

The adjustment is made in the corporation tax computation accompanying the CT600.

Why Does Deferred Tax Arise?

Deferred tax exists because:

• the accounts recognise the gain today; but

• corporation tax will only be payable when the property is eventually sold.

This timing difference creates a deferred tax liability.

Assuming a corporation tax rate of 25%:

Fair value gain:
£10,000

Deferred tax liability:
£2,500

Accounting entry:

Debit:
Deferred Tax Expense £2,500

Credit:
Deferred Tax Liability £2,500

The deferred tax ensures the tax expense is recognised in the same accounting period as the related accounting gain.

What Happens When the Property Is Sold?

Assume the property is eventually sold for £330,000.

Accounting

Carrying value:
£310,000

Sale proceeds:
£330,000

Accounting gain:
£20,000

Corporation Tax

The taxable gain is calculated using the property's tax base rather than its fair value carrying amount.

Purchase price:
£300,000

Sale proceeds:
£330,000

Taxable gain:
£30,000

The £10,000 previously excluded from corporation tax now becomes taxable.

At the same time, the deferred tax liability is reversed.

Journal:

Debit:
Deferred Tax Liability £2,500

Credit:
Deferred Tax Credit £2,500

The deferred tax reversal offsets the tax effect of the previously deferred gain.

Does Every Company Need Deferred Tax?

Not necessarily.

Deferred tax normally applies to companies preparing accounts under FRS 102.

Companies preparing accounts under FRS 105 (Micro-entities Regime) generally do not recognise deferred tax.

It is therefore important to identify the accounting framework before preparing the financial statements.

Common Mistakes

Many companies make one or more of the following errors:

• Leaving investment property at historical cost when fair value should be used.

• Including unrealised fair value gains within taxable profits.

• Failing to recognise deferred tax.

• Incorrectly classifying investment property as stock.

• Treating owner-occupied property as investment property.

• Omitting appropriate disclosures in the financial statements.

These errors can materially affect both the accounts and corporation tax computation.

How S & B Accountants Can Help

Preparing financial statements for property investment companies requires more than simply recording rental income and expenses.

Our team assists landlords, property investment companies and Special Purpose Vehicles (SPVs) with:

• Annual statutory accounts

• Corporation Tax Returns (CT600)

• Investment property accounting

• Fair value assessments

• Deferred tax calculations

• Director's loan accounts

• Property tax planning

• Companies House compliance

• HMRC compliance

If you own investment properties through a limited company, our experienced accountants can ensure your accounts comply with FRS 102 while optimising your corporation tax position.