Cash Basis for Landlords
Background
Following the less than favourable recent changes for landlords regarding finance cost relief, there is some silver lining to H M Revenue & Customs’ consultations about landlords and their taxes. Since 6th April 2017, the default accounting principle for landlords with a gross turnover of below £150,000 is the “cash basis”, so taxpayers looking at their 2017/18 tax returns need to be mindful of the way they calculate their property profits.
This marks a significant simplification to the preparation of rental accounts as it allows landlords to simply record income and expenses at the date they are received rather than having to think about accruals, prepayments, debtors and creditors as they may have had to do in the past under the “accruals basis”.
Detail
The measure is designed to make it easier for landlords to prepare their rental accounts and generally it seems it will do just that as they can spend less time calculating which expense goes where and how to apportion it correctly. There are however some complications in the criteria for using the cash basis which need to be looked at before jumping straight into it.
- Property Business – The property/properties must be owned by and individual in order to qualify for the cash basis. Properties owned by companies, partnerships, trustees of a trust and personal representatives are not eligible for the cash basis.
- Joint Owners – Where the property is owned jointly by two non-married taxpayers, each individual is taxed in respect of their own share. This means that if a profit split of 90/10 applied on a £200,000 turnover, the individual with the 10% share would use the cash basis by default whereas the individual with the 90% share would be over the £150,000 threshold and would therefore not be eligible meaning they would need to use the accruals basis.
- Married Joint Owners – The condition is slightly different if the two owners of a property are married. If one spouse has another rental property owned solely and the total turnover for his shares are above the threshold, both spouses must use the accruals basis.
According to Government figures, 2.36 million property businesses will be eligible to use the cash basis so the impact of this change will be far-reaching and will come to fruition over the coming months as Tax Returns are being prepared for 2017/18.
It is important that landlords have a good understanding of how the change will affect them so if you have any questions regarding the preparation of your rental accounts or any of the points raised above, please contact our Tax Director, Jenny Marks, for more information.
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