Changes to the calculation of rental profits for landlords with rental receipts of less than £150,000

With effect from 6 April 2017 the default accounting position for landlords of both residential and commercial properties with a total gross income of less than £150,000 will be the cash basis rather than the accruals basis as was the case previously.

The new rules have been introduced as a simplification measure prior to the introduction of  Making Tax Digital (MTD) with the aim that eventually tax returns are pre-populated with information from letting agents and taxpayers need only then add those expenses they have incurred personally.

Whilst the new regime is now the default position, taxpayers may elect to prepare their rental income accounts on the old basis, i.e. including income when it falls due and expenses when the liability is incurred, rather than when the amounts are physically received/paid.

What changes for landlords under the cash basis accounting rules?

The most significant effects of adopting the cash basis rules are:

• Rental income and expenses are recognised on receipt or payment; if you use a letting agent the rental income will be deemed to arise when the rent is paid to the agent and not when the landlord receives it.
• Loan interest restrictions may apply (in addition to those limiting interest relief to basic rate).
• No deduction for capital allowances, which is likely to mean that those with an interest in commercial property elect to disapply the cash basis.
• Introduction of a mileage allowance (previously only actual expenses of running the vehicle, together with capital allowances could be claimed).

When calculating the amount of gross rental income to check if the new rules apply, taxpayers  will need to include an appropriate share of their rent from jointly held properties.

Where joint owners of a property are married to each other they must use the same basis of accounting for their rental income whereas unmarried joint owners can choose which option they prefer, even if that results in a different basis being used by different owners of the same property.

Partnerships which hold property can use the cash basis if the total gross rental income is less than £150,000 and there are no corporate partners.

The impact of the new cash accounting system will depend upon the specifics of the taxpayer’s personal circumstances and therefore we’d recommend speaking to your accountant to be clear whether it would be beneficial to elect to continue to report property income under the old rules to avoid unwittingly increasing your tax liability.

If you have any questions about the use of cash basis for landlords please contact us at partners@rjp.co.uk.