Investment property valuation is a critical aspect of financial reporting, influencing stakeholders’ perceptions and strategic decisions. In the UK, two primary financial reporting standards—FRS 102 and FRS 105—offer differing approaches to investment property valuation. Understanding these differences is essential for entities to make informed choices aligning with their financial reporting objectives

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FRS 102: Fair Value Measurement

FRS 102 mandates that investment properties be measured at fair value at each reporting date, with changes recognized in profit or loss. This approach reflects current market conditions, providing stakeholders with up-to-date information on the property’s value.​

Key Features:

• Fair Value Requirement: Investment properties must be revalued to fair value annually.​
• Profit or Loss Impact: Gains or losses from revaluation are recognized in the income statement.​
• Deferred Tax Consideration: Revaluation gains may necessitate recognizing deferred tax liabilities.​Steve Collings

Implications:

• Enhanced Transparency: Fair value accounting offers a realistic view of asset values, aiding stakeholders in decision-making.​
• Volatility in Earnings: Fluctuations in market value can introduce volatility in reported profits.​
• Credit Assessment: Up-to-date valuations can positively influence credit ratings by reflecting the current financial position.​

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FRS 105: Historical Cost Measurement

FRS 105, applicable to micro-entities, requires investment properties to be measured at historical cost less accumulated depreciation and impairment. Revaluation to fair value is not permitted under this standard.​

Key Features:

• Cost-Based Measurement: Assets are recorded at purchase price, adjusted for depreciation and impairment.​
• No Revaluation: Fair value adjustments are not allowed, even if market values change significantly.​
• Simplified Reporting: The standard aims to reduce the reporting burden for small entities.​

Implications:

• Stability in Earnings: Absence of revaluation leads to more stable profit figures over time.​
• Potential Understatement: Asset values may be understated compared to current market conditions, possibly affecting business valuation.​
• Limited Insight for Stakeholders: Lack of fair value information may hinder stakeholders’ ability to assess the entity’s financial health accurately.​

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Comparative Analysis: FRS 102 vs. FRS 105

Aspect	FRS 102	FRS 105
Valuation Basis	Fair value with annual revaluation	Historical cost; no revaluation permitted
Impact on Earnings	Potential volatility due to market fluctuations	Stable earnings; no market-driven adjustments
Asset Valuation Accuracy	Reflects current market conditions	May not represent true market value
Stakeholder Insight	Provides transparent, up-to-date information	Limited visibility into asset appreciation
Credit Rating Influence	Positive, due to realistic asset valuations	Neutral or negative, due to outdated valuations
Business Valuation Impact	Enhanced, reflecting true asset worth	Potentially diminished, due to conservative valuations

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Strategic Considerations

Entities must weigh the benefits of transparency and accurate asset valuation against the simplicity and stability offered by each standard. FRS 102’s fair value approach may be advantageous for entities seeking to provide stakeholders with current financial information, potentially improving credit ratings and business valuations. Conversely, FRS 105’s cost-based approach simplifies reporting but may not capture the true economic value of investment properties.​IAS Plus

Recommendations:

• Assess Entity Size and Complexity: Micro-entities may opt for FRS 105 for its simplicity, while larger entities might prefer FRS 102 for comprehensive reporting.​
• Consider Stakeholder Needs: Entities aiming to attract investors or secure financing may benefit from the transparency of FRS 102.​
• Evaluate Financial Strategy: Align the choice of standard with long-term financial goals and reporting objectives.​

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Conclusion

The choice between FRS 102 and FRS 105 significantly impacts how investment properties are reported, influencing stakeholders’ perceptions and financial decision-making. Entities should carefully consider their specific circumstances, stakeholder requirements, and strategic objectives when selecting the appropriate financial reporting standard.​

In the Spring Budget 2024, the Chancellor announced a significant change that will directly impact companies owning furnished holiday lets/Serviced Accommodation (SA): the Furnished Holiday Lettings (FHL) tax regime will be abolished from April 2025.

This change marks the end of a beneficial tax regime that has been in place for decades, and it carries important implications for tax planning, particularly for companies that have structured their property investments to take advantage of FHL rules.

📌 What Is Changing?

From 6 April 2025, the FHL regime will no longer apply. This means:

• No more capital allowances on items like furniture and fittings.
• No Business Asset Disposal Relief (BADR) on the sale of FHL properties (previously allowing 10% CGT rate).
• No rollover relief when reinvesting proceeds into other trading assets.
• Section 24 applies to individuals and partnerships

👨‍💼 Why Does It Matter for Companies?

While the FHL regime was originally designed with individuals in mind, many companies have also benefited from the enhanced deductions and CGT treatment. With its removal, companies will now be taxed in the same way as other property businesses.

This will particularly affect:

• Profit extraction strategies – if profits reduce, dividends and director remuneration may need to be reassessed.
• Incorporation plans – some landlords may reconsider moving personally owned FHLs into companies now that the tax advantages are disappearing.

🔍 What Should Companies Do Now?

1. Review planned disposals: If you’re an individual planning to sell a holiday let, the three-year rule allows disposals of holiday let properties up to April 2028 to qualify for BADR, provided the FHL business ceased before 6 April 2025, and all other conditions for BADR are satisfied. This includes ensuring that the disposal is made in good faith without a primary purpose of obtaining tax advantages. Clear evidence and statements may be required to support the claim for relief. BADR can apply to the sale of shares if the above conditions are satisfied. For example:
   • The individual must hold at least 5% of the shares in a trading company or group.
   • The shares must have been held for at least two years, and the individual must have been an employee or officer during this time.
   • The total gains eligible for BADR must not exceed the lifetime limit of £1 million for disposals made after 11 March 2020.
2. Capital allowances: From 6 April 2025, existing capital allowances related to furnished holiday lettings can generally be carried forward under transitional rules. These allowances will be transferred to the appropriate pool for the corresponding property activity (UK or overseas property business). Elections and short-life asset treatments made before this date will remain valid, without a deemed disposal event as of 5 April 2025. However, capital allowances will not apply to new expenditure on former FHL properties after the regime’s abolition. Owners should carefully review their existing allowances and consider the transitional rules to maximise available relief.
3. Profit forecasts: Update business plans and tax projections to reflect reduced tax efficiency from 2025.

📝 Final Thoughts

This change underscores the government’s broader aim to simplify property tax treatment and reduce the favourable treatment of short-term letting. For corporate landlords operating holiday lets, this is a key moment to reassess tax strategy and ownership structure.

We are here to help, please book a meeting if you want to discuss the changes

It was announced in the March 2024 budget that the special treatment of Holiday Lets (FHL) would be abolished from the 6th April 2025. That’s in 10 months time!!

In 2017 there were around 8,000 FHLs by 2022 there were 111,000 in the UK, the growth has been incredible, which is why the Government have changed the rules to cash in and also to release properties for the long term let market.

Key Problems

Capital Allowances

One of the major benefits of holiday lets/serviced accommodation has been and is Capital Allowances. These have been claimed by both individuals and companies.

Many FHL owners have claimed between 20% and 40% of the property value saving considerable tax, its been the top advantage of holiday lets for most owners and its key reason behind personal ownership which allowed the profits offset by Capital Allowances to be extracted tax free.

Now the regime is ending (5th April 2025) the market value of the assets (Integral Features and Plant & Equipment) may need to be assessed and a balancing charge may be payable. This could effectively refund HMRC with the tax that had been reclaimed.

Interest Restriction

This won’t apply to companies.

Companies will have a clear tax advantage for FHL ownership in the future.

Individual FHL owners will be taxed in the same way as BTL owners, this means Interest will no longer be an allowable cost and instead they will get the finance allowance. This is fine if you are 20% tax payer but will mean additional tax for 40% tax payers.

Residential Letting – What is the Finance Cost Allowance and how are Unused Finance Costs used up? – Steve J Bicknell Tel 01202 025252

CGT Reliefs

If you sell or transfer your FHL now you can still benefit from generous Capital Gains Tax Allowances (SDLT LBTT LTT may be payable)

Business Asset Disposal Relief (BADR)

This was previously known as Entrepreneurs Relief, basically, subject to rules, if you dispose of your FHL business, the gain is taxed at 10%.

Its anticipated that the date of disposal will be critical. In other words, an individual who ceased their FHL business will only qualify for BADR if they dispose of their FHL by the earlier of three years from the date of cessation or 5^th April 2025.

We don’t expect the end of the regime on the 5^th April 2025 to count as cessation for BADR, meaning you can then dispose of the property then claim BADR in the following three years.

So there is clear incentive to sell now before the change takes place.

HS275 Business Asset Disposal Relief (2024) – GOV.UK (www.gov.uk)

Rollover Relief

This allows the FHL owner to rollover over their gain into a new business property.

It is clear that this relief will not be available after 5^th April 2025, however, if a sale took place before the deadline could the gain be rolled over into a new qualifying business property for example a shop?

Let’s hope so, otherwise there will be no option but to pay the CGT rolled over.

HS290 Business Asset Roll-over Relief (2024) – GOV.UK (www.gov.uk)

Holdover Relief

Where the intention is to keep an FHL property within the family, there are a number of tax planning opportunities. FHL properties that meet the qualifying criteria are able to benefit from s. 165 business asset holdover relief, and they may also qualify for business property relief, so enabling a gift into trust without a lifetime inheritance tax charge. In the latter case, holdover relief under TCGA 1992, s. 260 would apply as it takes priority over s. 165.

Holdover relief for FHL’s will end on 5^th April 2025

Gift Hold-Over Relief – GOV.UK (www.gov.uk)

Incorporation Relief

Its likely that an FHL business will qualify for incorporation tax relief, this should continue after the 5th April 2025. The important factor is the level of activity as outlined in the Ramsey Case.

HS276 Incorporation Relief (2024) Roll-over relief on transfer of a business – GOV.UK (www.gov.uk)

Anti Forestalling

The Government announced at Spring Budget 2024 that the Furnished holiday lettings tax regime (FHL) will be abolished from April 2025. The Finance (No. 2) Bill 2024 will include an anti-forestalling rule to prevent access to capital gains tax reliefs through the use of unconditional contracts, to apply from 6 March 2024. This is yet to be enacted and may be subject to change.

The date of disposal is the date of an unconditional contract which in England and Wales is normally the date of exchange.

So CGT reliefs would be based on that date not the completion date.

What this means is that any contract has to complete by the 5^th April 2025

The abolition of FHL Tax Breaks is supported by both Labour and Conservatives, in fact Labour wanted to make the change back in 2010, so its unlikely who ever wins the election will stop the changes taking place.

Contact Us

Now is time to consider your option, we can help, please get in touch, book a meeting or drop me an e mail steve@bicknells.net