What if you move a Property from Fixed Asset Investment to Trading Stock or Vice Versa? Appropriations and Reclassifaction

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The rules are in

CG67900 – Capital Gains Manual: Businesses: Appropriations to and from stock in trade

Appropriation treated as a disposal – TCGA92/S161 (1)

Where an asset (which was acquired by a person otherwise than as trading stock) is later appropriated for use as stock in that person’s trade, the transfer is dealt with for trading profits as if there were a sale and purchase at market value, see BIM33630. For capital gains purposes, TCGA92/S161 (1) deems the asset to have been sold for its open market value at the date of transfer.

Election to defer CG charge – TCGA92/S161 (3)

Collection difficulties might arise because tax on chargeable gains may become due and payable before there has been a factual disposal of the asset. To relieve this problem, the trader may make an election under TCGA92/S161 (3). If an election is made, there will be no chargeable gain on the appropriation of the asset to trading stock. Instead, in the computation of trading profits, the market value of the asset will be reduced by the amount of the chargeable gain. The effect of an election is that the trading profits or losses will include the whole of the income profit and the capital gain accruing on the asset over the whole period of ownership.

So what happens if you have a develop a property and then decide to keep it as an investment rather than sell it?

This known as reclassification and there would be an immediate deemed disposal under ITTOIA 2005 s 172B and CTA 2009 s 157 as a result a taxable trading profit would calculated based on the market value. 

The tax would be payable even though the property had not been sold and a profit had not been realised. No elections are available.