Under FRS 102 Section 16, property held to earn rent or for capital growth is measured at fair value at every reporting date, with gains and losses taken to profit or loss and no depreciation charged. Where a building is partly let and partly owner occupied, the let part is treated separately only if it could be sold or leased out on its own. Fair value gains reach the profit and loss reserve but are not realised profits, so they are not available for dividends.
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What counts as investment property?
The FRS 102 glossary defines investment property as property (a site or a building, or part of a building, or both) held by the owner, or by a lessee as a right of use asset, to earn rentals or for capital appreciation or both, rather than for:
- use in the production or supply of goods or services or for administrative purposes; or
- sale in the ordinary course of business.
So an office let to a third party, a buy to let flat held by a company, or a vacant site held for its long term value are investment property. A company’s own head office is property, plant and equipment under Section 17 (see property, plant and equipment). Houses a developer builds for sale are inventory. Paragraph 16.3A adds that property held primarily to provide social benefits, such as social housing held by a public benefit entity, is property, plant and equipment, not investment property.
From periods beginning on or after 1 January 2026, the Periodic Review 2024 amendments brought leased property into scope through the right of use asset, as the FRC explains in paragraph B16.5 of its basis for conclusions. A head lessee that sublets a floor may now hold investment property. See FRS 102 changes from 2026.
How is investment property measured?
Paragraph 16.5 requires initial measurement at cost: the purchase price plus directly attributable expenditure such as legal and brokerage fees, property transfer taxes such as Stamp Duty Land Tax, and other transaction costs. If payment is deferred beyond normal credit terms, cost is the present value of the payments.
Paragraph 16.7 then requires measurement at fair value at each reporting date, with changes in fair value recognised in profit or loss. There is no depreciation. Section 2A gives guidance on determining fair value. Company law permits this: Schedule 1 paragraph 39 of the 2008 accounts regulations allows investment property to be included at fair value, and paragraph 40 requires the change in value to go to the profit and loss account.
The older relief allowing cost where fair value involved undue cost or effort no longer exists. The FRC explains in paragraph B16.1 that it was removed in the Triennial Review 2017 because UK entities should generally be able to obtain a fair value, and ICAEW’s helpsheet confirms it is not available under current FRS 102.
FRS 102 does not prescribe where in the profit and loss account the gain or loss is shown. ICAEW suggests a property company might use other operating income, or add a separate line for gains on remeasurement of investment property, applied consistently.
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How are mixed use properties split?
Paragraph 16.4 requires mixed use property to be separated between investment property and other property if the portions could be sold separately or leased out separately under a finance lease. The let part is then held at fair value and the occupied part under Section 17, normally at cost less depreciation.
If the portions could not be sold or leased separately, the property is not split. Paragraph 16.4 also says that if the fair value of the investment component cannot be measured reliably, the whole property is accounted for under Section 17 if owned, or as a right of use asset under Section 20 if leased.
Illustration only. A company owns a three storey building on separate leasehold titles per floor. It occupies the ground floor and lets the upper two floors to unrelated tenants. Because each floor could be sold separately, the upper floors are investment property at fair value and the ground floor is depreciated under Section 17. If the floors could not be sold or leased separately, paragraph 16.4 does not allow a split, and classifying the whole building needs judgement about its use.
What about property let to another group company?
ICAEW notes that a property owned by one group company and let to another meets the definition of investment property in the owner’s individual accounts, but is property, plant and equipment in the consolidated accounts. Paragraph 16.4A therefore lets the owner choose, for such properties, either fair value through profit or loss, or transfer to property, plant and equipment under the Section 17 cost model (or the Section 20 cost model for a lessee). Paragraph 16.4B limits the choice to the part let within the group. ICAEW points out that the revaluation model is not available if the cost route is chosen.
Are fair value gains distributable?
No, not usually. ICAEW’s helpsheet states that fair value gains on investment property are not realised profits in law and so are not available for distribution, referring to paragraph 4.13 of TECH 02/17BL. Fair value losses are normally treated as realised, under paragraphs 4.29 to 4.33 of the same guidance.
Gains sit in the profit and loss reserve automatically. ICAEW suggests transferring them, net of related deferred tax, to a separate non distributable reserve so directors can see what is genuinely available. This is a practical point for property companies paying dividends; see how to pay dividends legally.
How does deferred tax work on revalued investment property?
Paragraph 29.16 requires deferred tax on investment property at fair value to be measured using the tax rates and allowances that apply to the sale of the asset, except for property with a limited useful life held in a business model designed to consume substantially all of its benefits over time. ICAEW explains that the current tax consequences of a change in value usually arise only on sale, so a timing difference exists, and deferred tax is measured on a sale basis whether or not a sale is intended, using rates enacted or substantively enacted at the reporting date.
Worked example: first year at fair value
Illustration only. Based on the ICAEW helpsheet example: a company buys an investment property for £300,000. At the year end its fair value is £320,000.
| Entry | Debit | Credit |
|---|---|---|
| On purchase | Investment property £300,000 | Cash £300,000 |
| Year end remeasurement | Investment property £20,000 | Profit and loss £20,000 |
| Optional reserve transfer | Profit and loss reserve £20,000 | Non distributable reserve £20,000 |
Deferred tax is then provided on the £20,000 on a sale basis, and the net amount is what the non distributable reserve should show.
When does property move in or out of investment property?
Paragraph 16.9 allows a transfer only when the property meets, or stops meeting, the definition and there is evidence of the change in use. Paragraph 16.9A says that when a property becomes owner occupied or inventory, its fair value at the date of change becomes deemed cost. Under paragraph 16.9B, an owner occupied property that becomes investment property is accounted for under Section 17 up to the change, and the difference to fair value is treated like a revaluation. Under paragraph 16.9C, a transfer from inventory recognises the difference in profit or loss.
What else should preparers know?
- Disclosures. Paragraph 16.10 requires the methods and significant assumptions used for fair value, the extent to which it is based on an independent qualified valuer (or the fact that there was no such valuation), restrictions, contractual obligations, and a reconciliation of movements.
- Micro entities. FRS 105 paragraph 12.14 requires investment property to be held at cost less depreciation and impairment. Fair value is not available. See FRS 105.
- Common mistakes. Depreciating investment property; leaving it at cost because a valuation seems expensive; paying dividends out of revaluation gains; and failing to split mixed use buildings that could be sold floor by floor.
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Related Accountapedia entries
- Property let to a group company: accounting choice
- Property developers: stock or investment property
- Revaluing fixed assets and the revaluation reserve
- Can micro entities revalue property
- Deferred tax on revaluations and investment property
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- ICAEW: Investment property under frs 102
- legislation.gov.uk: SI 2008/410, schedule 1
- legislation.gov.uk: SI 2008/410, schedule 1
- Financial Reporting Council: FRS 105 September 2024
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.