Don’t get caught out by changes to accounting basis for landlords
8 August 2018
The usual accruals basis for taxation of rental income has been replaced by the cash basis, introduced from 6 April 2017. With the intention of being a simpler alternative, are you aware of these changes and how they will affect you whilst you prepare your 17/18 tax returns?
The cash basis is now the default basis for most property businesses run by individuals and partnerships with annual turnover of £150,000 or less.
Using the cash basis, amounts are accounted for when money is received or paid, not when earned or incurred, so there is no need to account for debtors/creditors.
The profit and loss is to be reported as:
Total receipts (less) Total expenses (subject to any necessary adjustments required by law)
However, if any of the following apply, the usual accruals basis must be used instead:
- The property business is within a Company/LLP/Trustees/Corporate firm (partnership with non-individual member(s))
- Total receipts exceed £150,000 (this is apportioned for a part year of rental income)
- For spouses, the same basis must be used for them both in respect of jointly owned property, unless they have elected to be taxed in unequal shares
- Business premises renovation allowance has been claimed and a balancing event in the tax year gives rise to a balancing adjustment
- An election is made to use the accruals basis because it is believed to be more appropriate (there is a tick box on the tax return to make this election).
The cash basis applies to all rental income including Rent a Room and Furnished Holiday Lettings (FHL).
You can choose whether to use the cash basis or elect to use the accruals basis separately for each of their property businesses. For example, if you have an overseas property business, a UK property business and a UK FHL business, you can elect separately for each.
There are a few small differences between the accruals basis and the cash basis, but these would not appear to pose any significant issues for the majority of our clients and therefore Old Mill propose to use the cash basis where relevant.
As we move from the accruals basis to the cash basis, there will be a number of adjustments to be made in this first year (2017/18) to unravel any accruals/prepayments from the previous year and also to deal with remaining Capital Allowance pools.
Should you have any queries with regards to how this change may impact you, please do not hesitate to get in touch with your usual Old Mill contact.