A revaluation gain on property creates deferred tax because the accounts recognise the gain now but a company is only taxed on it when the property is sold. FRS 102 paragraphs 29.15 and 29.16 require that deferred tax on non depreciable revalued assets and on investment property at fair value is measured using the tax rates and allowances that would apply on a sale, at rates enacted or substantively enacted by the reporting date.

Why does a revaluation gain create deferred tax at all?

FRS 102 Section 29 works on timing differences. Paragraph 29.6 defines them as differences between taxable profits and total comprehensive income that arise because income and expenses are included in tax assessments in periods different from those in which they appear in the financial statements. Deferred tax must be recognised on all timing differences at the reporting date, subject to a few exceptions.

When a company revalues a building under the Section 17 revaluation model, or remeasures an investment property to fair value under Section 16, the gain is in total comprehensive income straight away. A company pays Corporation Tax on a chargeable gain only when it sells or disposes of the asset. ICAEW’s helpsheet on investment property explains that the current tax consequences of a change in value usually arise only on sale, which is a timing difference and so gives rise to deferred tax. The background accounting is covered in revaluing fixed assets and investment property accounting; this page deals with the deferred tax calculation itself.

What does measuring on a sale basis actually mean?

Paragraph 29.15 applies to a non depreciable asset measured using the revaluation model, such as the site under a building. Paragraph 29.16 applies to investment property measured at fair value. Both say the deferred tax is measured using the tax rates and allowances that apply to the sale of the asset. ICAEW confirms this applies whether or not the company actually intends to sell, because the standard assumes the value is recovered through sale rather than use.

In practice, that means working out the tax that would be payable if the property were sold at its carrying amount at the reporting date, and comparing it with the position if it were sold at its tax base. For a company, the relevant computation is the chargeable gain. Points to build in include:

  • Indexation allowance. GOV.UK guidance says that if the company had the asset before December 2017, it uses HMRC’s indexation allowance figures for December 2017 when working out the gain. Indexation therefore reduces the taxable amount on older properties but does not grow after that date.
  • Structures and buildings allowance. Section 37B of the Taxation of Chargeable Gains Act 1992 treats the disposal consideration as increased by the structures and buildings allowance the company has claimed. If the company has claimed this allowance, the sale basis calculation must add it back.
  • The exception in 29.16. The sale basis does not apply to investment property with a limited useful life held in a business model whose objective is to consume substantially all of its economic benefits over time. A short leasehold interest consumed through letting is the type of case this is aimed at.

For a depreciable building carried at valuation, the sale basis in 29.15 does not apply automatically. ICAEW says an assessment is needed of whether the value will be recovered through use or sale, and that assessment informs the rate used.

Which tax rate should be used?

Paragraph 29.12 requires deferred tax to be measured using the tax rates and laws enacted or substantively enacted by the reporting date that are expected to apply when the timing difference reverses. ICAEW explains that a rate is substantively enacted once it is in a Bill that has passed the House of Commons and awaits only the House of Lords and Royal Assent, or in a resolution with statutory effect under the Provisional Collection of Taxes Act 1968.

For the financial year starting 1 April 2026, GOV.UK shows a small profits rate of 19% for companies with profits under £50,000 and a main rate of 25% for companies with profits over £250,000, with marginal relief in between (see marginal relief). Paragraph 29.13 deals with this banding: where different rates apply to different levels of taxable profit, deferred tax is measured using the average enacted or substantively enacted rate expected to apply to the taxable profit of the periods in which the liability is expected to be settled. A small company whose profits normally sit below £50,000 cannot simply use 19% if a sale of the property would itself push profits into the marginal band.

A rate change announced after the year end but before the accounts are approved does not change the figures. ICAEW’s example treats it as a non adjusting event, disclosed if material (see events after the reporting period).

How is it calculated? A worked example

Illustration only. A company with taxable profits comfortably above £250,000 owns two properties at its 31 March 2027 year end. Neither qualifies for indexation because both were bought after December 2017, and no structures and buildings allowance has been claimed.

Item Investment property Owner occupied site (revaluation model)
Cost (tax base for a gain) £400,000 £150,000
Carrying amount at year end £520,000 £210,000
Timing difference £120,000 £60,000
Deferred tax liability at 25% £30,000 £15,000
Where the charge goes Profit or loss Other comprehensive income

If the investment property had been held since before December 2017 and the indexation allowance frozen at that date came to, say, £40,000, the timing difference would be £80,000 and the liability £20,000. If the company had claimed £12,000 of structures and buildings allowance on the building, that amount would be added back, giving a timing difference of £92,000.

Does the deferred tax go through profit or loss or other comprehensive income?

Paragraph 29.22 requires tax expense to be presented in the same component of total comprehensive income, or equity, as the transaction that gave rise to it. ICAEW gives the two common results: deferred tax on an investment property remeasurement goes through the tax line in profit or loss, because the fair value movement does; deferred tax on a Section 17 revaluation goes to other comprehensive income alongside the revaluation gain.

In the balance sheet, paragraph 29.23 places deferred tax liabilities within provisions for liabilities and deferred tax assets within debtors, unless the formats have been adapted. Paragraph 29.17 prohibits discounting, even if a sale is many years away. Paragraph 29.24A permits offset of deferred tax assets and liabilities only where there is a legally enforceable right to set off current tax and the balances relate to the same taxation authority on the same taxable entity, or entities that intend to settle net.

What if the company plans to roll the gain over or never sell?

Neither removes the liability. ICAEW states that deferred tax will usually need to be provided on revaluation movements even if rollover relief is expected to be available, because rollover relief only delays the tax rather than eliminating it. For investment property, the sale basis applies irrespective of any intention to sell. A note saying the property is a long term hold is not a reason to leave deferred tax out.

How does this interact with reserves and dividends?

Fair value gains on investment property pass through profit or loss but are not realised profits. ICAEW suggests that where a company keeps a separate non distributable reserve, it transfers the deferred tax effect into that reserve as well, so the reserve shows the gain net of deferred tax. For revalued assets, the revaluation reserve is credited with the gain and debited with the related deferred tax via other comprehensive income. Directors assessing what can be paid out should look at paying dividends legally rather than the headline profit figure.

What do small companies and micro entities have to do?

Small companies applying Section 1A still recognise deferred tax in full. Paragraph 1AC.32C requires them to give the disclosures in 29.26 (the major components of tax expense) and 29.27(b) (the reconciliation of the tax charge to profit multiplied by the applicable rate). Larger entities also disclose the tax on items in other comprehensive income, the expected reversal in the following year, the reasons for any change in rates and the liability for each type of timing difference under 29.27.

Micro entities under FRS 105 are in a different position: paragraph 24.7 says a micro entity shall not recognise deferred tax, and FRS 105 does not permit revaluation in the first place.

What mistakes come up most often?

  • Using the current year rate rather than the rate expected on reversal under 29.12 and 29.13.
  • Applying 19% to a small company’s revaluation without considering whether the sale would take profits into the marginal band.
  • Ignoring indexation frozen at December 2017 on older property, or forgetting to add back structures and buildings allowance claimed.
  • Posting deferred tax on a Section 17 revaluation through profit or loss instead of other comprehensive income.
  • Leaving out deferred tax because rollover relief is expected or no sale is planned.
  • Discounting the liability because a sale is a long way off, which 29.17 prohibits.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.