01 Apr 2017 Cash basis for unincorporated landlords from 6 April 2017
As part of the measures being introduced with Making Tax Digital, to assist landlords in reporting their income, the cash basis will be available for unincorporated landlords from 6 April 2017 (ie for 2017/18 onwards).
For many landlords this will be a welcome simplification in determining the profits to be reported for tax purposes. However, there are various matters that landlords should consider before accepting this change from preparing accounts on Generally Accepted Accounting Principles (GAAP), such as:
- If rent is payable in advance, then this could accelerate the payment of tax on income, especially where the rent is paid for three or six months in advance shortly before 6 April (or the accounting year end for partnerships).
- If the payment of rent is delayed in one year and paid on time in the subsequent year, then although payment of tax on the income will be deferred in the earlier year, it may “bunch” the income in the latter year, so that tax or benefit thresholds are exceeded where they would not be if accounts are prepared under GAAP.
- Relief for expenses will only be available when payment is made, rather than when the obligation to make the payment arises.
If the cash basis is going to be used, it must be used for the rental business as a whole, it is not an election on a property by property basis. If spouses (or civil partners) each have a rental business, and they own just one property jointly, then they will have to use the same basis for their entire property business as they must use the same basis for their jointly owned property. However, individuals with both a UK and overseas property can decide separately whether to apply the cash or accruals basis.
There is a simplified treatment of capital expenditure, which does not normally change the tax relief from the existing capital allowances. However, landlords should be aware of the differences:
- There is no ability to defer claiming the expenditure as there is when capital allowances are claimed, so reliefs or rate bands may be wasted where there is fluctuating overall income. This may be particularly relevant in years where there are significant repairs or void periods.
- There is no deduction for the capital cost of a car.
As with accounts prepared using GAAP, there is no deduction for initial capital expenditure on items in domestic dwellings, but instead replacement domestic items relief is available (ie tax relief is given for replacement rather than the initial cost of items used in residential dwellings, with the exception of furnished holiday accommodation).
Landlords can choose to retain the existing GAAP basis for reporting their property income and the cash basis is not available where:
- The gross annual rents exceed £150,000;
- The landlord is a trust; or
- The landlord is a mixed member partnership (defined as a corporate firm in the legislation), which is where one of the partners is not an individual.
A decision on whether to accept the cash basis or elect to retain the GAAP basis does not need to be made until the 2018 tax return is prepared, but landlords should be considering these changes during the year, especially as the year end nears.
Please see Measures omitted from Finance Act due to General Election for an update following the shortening of 2017 Finance Bill measures due to the June General Election.
For our most recent update regarding Making Tax Digital please click here. However, please note that the above measures are scheduled to be included in the second 2017 Finance Bill, to be moved in the House of Commons on 6 September following the summer recess.
If you have any queries, please contact your usual consultant or Caroline Lovibond on 01865 261100 ([email protected])