In the owning company’s own accounts, a property let to another group company is investment property, and FRS 102 paragraph 16.4A lets the owner choose between fair value through profit or loss and the cost model with depreciation. In the consolidated accounts the group occupies its own building, so the property is property, plant and equipment, the intra group rent disappears, and any fair value gains taken in the owner’s accounts are reversed.

Why is the same building treated differently in two sets of accounts?

The FRS 102 glossary defines investment property as property held 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. A property company that owns a building and lets it to a trading subsidiary or sister company is earning rent, so in its own individual accounts the definition is met.

The consolidated accounts present the group as a single entity. ICAEW’s helpsheet on investment property explains that, applying that single entity view, a property owned by one member and occupied by another is not investment property in the group accounts and will normally fall within property, plant and equipment. From the group’s point of view it is simply the group’s own premises.

This is a common structure in owner managed groups, where the freehold sits in a separate company from the trade. The general rules for investment property are on the investment property accounting page; this page focuses on the group letting case.

What choice does the owning company have?

Paragraph 16.4A requires an entity that rents investment property to another group entity to choose to account for those properties either:

  • at fair value with changes recognised in profit or loss under Section 16; or
  • by transferring them out of investment property and applying a cost model: Section 17 for property the entity owns, or Section 20 for property it holds as a lessee through a right of use asset.

Paragraph 16.1A confirms that Section 16 then no longer applies to property accounted for under the cost route, and paragraph 17.1(b) brings it within Section 17. ICAEW notes that where the property is transferred to property, plant and equipment, the revaluation model is not available. The choice is therefore fair value through profit or loss, or cost less depreciation and impairment; there is no middle option of revaluing through other comprehensive income in the owner’s accounts.

Paragraph 16.4B limits the choice to the part let within the group. If one floor is let to a sister company and the rest to an outside tenant, only the sister company’s floor can take the cost route; the externally let part stays at fair value.

An entity using the cost route must give all the disclosures of the relevant section other than those about fair value measurement (paragraphs 16.4A and 17.30A).

How do the two options compare in the owner’s accounts?

Illustration only. PropCo buys a building for £2,000,000, of which £500,000 relates to the site. The building element is given a 50 year life with nil residual value. PropCo lets it to TradeCo, a fellow subsidiary, for £120,000 a year. At the first year end the property’s fair value is £2,200,000. Deferred tax is shown at an assumed 25%.

PropCo profit and loss, year 1 Fair value route £ Cost route £
Rent from TradeCo 120,000 120,000
Fair value gain 200,000 Nil
Depreciation (£1,500,000 over 50 years) Nil (30,000)
Deferred tax on fair value gain (50,000) Nil
Carrying amount of property at year end 2,200,000 1,970,000

Under the fair value route, paragraph 29.16 requires deferred tax on investment property at fair value to be measured using the tax rates and allowances that apply to sale of the asset. Under the cost route, deferred tax follows the ordinary rules for fixed assets; see deferred tax under FRS 102. The fair value route also needs a reliable valuation at every reporting date, which is a running cost for small groups.

Can PropCo pay a dividend out of fair value gains?

Not out of the unrealised element. ICAEW’s TECH 02/17BL, paragraph 4.13, states that no part of an increase in the fair value of investment property is readily convertible to cash, so it is not a realised profit, because a period of marketing or negotiation would be needed to sell. ICAEW’s helpsheet suggests tracking such gains in a separate non distributable reserve. A PropCo that takes the fair value route can therefore show a healthy profit and loss reserve that it cannot lawfully distribute, which is worth explaining to directors before they plan dividends. The cost route avoids this mismatch because no unrealised gain is recognised.

What happens in the group accounts?

Paragraph 9.17 requires consolidated accounts to use uniform accounting policies for like transactions in similar circumstances, with adjustments made to a member’s figures where its policy differs. Because the group occupies the building, it is property, plant and equipment at group level, measured under Section 17 using either the cost model or the revaluation model for the whole class.

The usual consolidation adjustments are:

  1. Eliminate the rent income in PropCo against the rent expense in TradeCo. Paragraph 9.15 requires intragroup balances and transactions, including income and expenses, to be eliminated in full.
  2. If PropCo used the fair value route, reverse the fair value gains and the related deferred tax, and replace them with the group’s own measurement and depreciation.
  3. If the group uses the revaluation model, recognise revaluation gains in other comprehensive income under paragraph 17.15E rather than in profit or loss, and continue to depreciate the revalued amount.
  4. Recognise deferred tax on any timing differences that arise; paragraph 9.15 confirms Section 29 applies to differences created by intragroup eliminations.

In the illustration, group profit would show depreciation of £30,000 under the cost model, no rent and no fair value gain. ICAEW notes that the owner’s choice under paragraph 16.4A should not affect the consolidated accounts, which is one reason many groups choose the cost route in PropCo: it brings the individual accounts into line with the group figures and removes a layer of adjustments. The mechanics of consolidation are covered in FRS 102 consolidated accounts.

Can the owner switch from one option to the other later?

Paragraph 10.10 treats a change in a previous choice of measurement basis as a change in accounting policy, and paragraph 10.8 permits a voluntary change only if it gives reliable and more relevant information. A switch is therefore possible but needs a justification, and is applied retrospectively under Section 10 with comparatives restated. A move that genuinely reflects a change of use is different: if the tenant leaves the group, or PropCo starts using the building itself, the transfer rules in paragraphs 16.9 to 16.9C apply instead.

Does this apply to micro entities and to property the owner leases?

A micro entity applying FRS 105 has no choice: paragraph 12.14 requires investment property to be carried at cost less depreciation and impairment, with components depreciated separately under paragraph 12.15. Where the group company holds the property on a lease and sublets it to a fellow subsidiary, paragraph 16.4A(b)(ii) points the cost route to the right of use asset rules in Section 20 rather than Section 17.

What mistakes come up most often?

  • Revaluing the property in PropCo through other comprehensive income, which is not one of the two options in paragraph 16.4A.
  • Applying the cost route to parts of a building let to outside tenants, contrary to paragraph 16.4B.
  • Paying dividends from unrealised fair value gains.
  • Forgetting to eliminate intragroup rent, or to reverse PropCo’s fair value gains, on consolidation.
  • Depreciating the site when the cost route is chosen; see depreciating freehold buildings.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.