Investment property: separate rental use from your own operations
A business buys one property containing offices it uses and a portion rented to independent tenants. It cannot classify the whole building by following the rent receipts. Under UK-adopted full IFRS, the purpose of holding each portion and whether the portions can be separated determine the accounting. The answer also changes how later value movements enter the accounts.
Establish use and separability
IAS 40 covers property held to earn rentals, for capital appreciation or both. Property used in the owner's operations or administration is different, as is property held for sale in the ordinary course of business. For owned property, those categories generally lead to IAS 16 and IAS 2 respectively.
For mixed use, paragraph 10 requires separate accounting if the portions could be sold separately or separately leased under a finance lease. Separate invoicing or a floor-area allocation alone does not establish that condition. If the portions cannot be separated, the whole qualifies as investment property only when the owner-used portion is insignificant.
The nature of services also matters. Insignificant security or maintenance can accompany investment property. An owner-managed hotel providing significant guest services is owner-occupied property. Assess the substance of any operating arrangement; collecting rent does not by itself settle the classification.
A separable rental portion and own office
All figures and dates are hypothetical. On 1 January 2026 a business buys two independently saleable portions of one property for £1 million, including qualifying transaction costs. Legal and practical evidence supports separate sale.
The rental portion costs £600,000 and is held for independent tenants under operating leases, with only insignificant security and maintenance services. The business uses the £400,000 office portion itself. Its supported allocation is £100,000 land and £300,000 building.
The rental portion is investment property from purchase. Assume the entity validly uses the IAS 40 fair value model for its ordinary investment property. Its 31 December value is £660,000, producing a £60,000 fair value gain in profit or loss. There is no annual depreciation under that model.
The owner-occupied portion uses the IAS 16 cost model. Assume a 30-year building life, nil residual value, straight-line depreciation and land with an unlimited life. Building depreciation is £300,000 / 30 = £10,000. The office closes at £100,000 land plus £290,000 building, totalling £390,000.
| Portion | Initial cost | Year-end carrying amount | Separate annual movement |
|---|---|---|---|
| Rental, IAS 40 fair value | £600,000 | £660,000 | £60,000 gain in profit or loss |
| Own office, IAS 16 cost | £400,000 | £390,000 | £10,000 depreciation |
| Combined | £1,000,000 | £1,050,000 | Gain and expense remain separate |
Keep the assumptions that change the answer
The illustration assumes no transfer of use, additions, impairment, rent-related balances or tax entries. The £60,000 is a subsequent fair value movement on property classified as investment property from purchase. It is not an IAS 16 revaluation surplus or a calculation for transfer from owner occupation.
If the portions were inseparable and own use significant, attributing 60% of cost to tenants would not permit this split. That percentage is an example assumption, not an IAS 40 threshold.
Ordinary IAS 40 also permits a cost-model policy, subject to its specified rules and exceptions. Fair value disclosure is generally required under that model. A public-sector report using an adapted policy does not remove the choice for an ordinary full-IFRS entity.
Document whose accounts and what changed
Property leased to and occupied by a parent or subsidiary can qualify as investment property in the owner's individual accounts, while remaining owner-occupied in group accounts. Identify the reporting entity before carrying a classification into consolidation.
For later transfers, document an actual evidenced change of use. A changed management intention alone is insufficient. Keep that classification decision separate from the subsequent valuation and its recognition rules.
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