Historically, individuals have been required to calculate their rental profits using what is known as an “accruals” basis. However, from 6th April 2017, for many individuals, the standard basis to use has changed to being what is known as the cash basis. This article examines the differences between the two, and to help you decide which one to use.
The accruals basis means that you should enter income and expenditure based on when it relates to, rather than when it is received or paid. This can mean some apportionment between different tax years.
To take an example of income, if you received a rental payment of £12,000 for 6 months in advance for a period between 6th January 2019 and 6th July 2019, this would clearly cross a tax year and an apportionment would need to be made. In this case 3 months’ rent of £12,000 X 3/6 = £6,000 would fall in to the 2018/19 tax year, and the remainder would be deferred until 2019/20 tax year.
This works the same way with expenditure. For example, if your annual insurance renewal date is 6th August 2018 each year, this would also crossover to separate tax years. In this case, eight months would fall into the 2018/19 tax year with the remaining four months falling into a 2019/20 tax year. In a similar way, we would need to make apportionment of this expenditure. if your insurance premium was £600, then 8/12 X £600 = £400 would be included in the 2018/19 tax year and £200 would be carried forward in to the 2019/20 tax year.
The cash basis simply means that you record income when you receive it, and record payments when you pay them out. In the previous example of the income received in advance of £12,000 for the period of 6th January 2019 to 6th July 2019, under the cash basis this would be recorded in full in the 2018/19 tax year. This would leave a larger amount of rental income in 2018/19 tax year and less in the 2019/20 tax year.
Similarly, carrying on from the previous example on insurance cost where the premium covers an entire year from 6th August 2018, the full amount of the premium is included in the 2018/19 tax year rather than being apportioned over two tax years.
Prior to 6th April 2017, property income would usually need to be on an accruals basis. HMRC did allow some leniency where the gross rental income was less than £15,000 and using the cash basis would not materially change the tax position for that year. From 6th April 2017 onwards, the cash basis is the method that normally applies as the basis for calculating rental profits, unless you opt out via your self assessment tax return.
There are a few exceptions to this where:
- Gross rental income exceeds £150,000 per property business (see below.)
- You have made an election on the tax return property pages to use the accruals basis (referred to as the traditional basis.)
- You have joint property that is held with a spouse (where no Form 17 has been filed) and the spouse is not using a cash basis.
- You hold property in a limited company or limited liability partnership (though not ordinary partnerships operating a rental property business with all partners being individuals and the gross rental income falling within the £150,000 limit.)
- The cash basis is not available to trusts
You should note that, for this purpose, your UK rental income and overseas rental income are treated as two separate businesses. Therefore, the £150,000 gross rental income limit applies separately. If, for example, your gross UK rental income exceeded £150,000 but your overseas rental income didn’t, you could still use the cash basis for your overseas rental income.
If I Have the Choice
Many landlords would fall within the £150,000 threshold and therefore have the choice to elect which basis to use. The plus side on the cash basis is it is simpler. It is very easy to do bookkeeping where you are recording what has been paid and what has been received in a period.
However, where you receive large rental payments in one year for a period that relates largely to the next tax year, this can produce an odd result in one year. This could also cause further effects if you are close to exceeding a tax band. Other disadvantages in more complex areas include, but not limited to, interest relief and amongst others.
For some landlords, the accruals basis is of greater benefit to landlords than the cash basis, simply because rent is normally paid one month in advance, and expenses are normally paid in the opposite way. Although it may be the opposite for other landlords, and there may be some landlords who would benefit from moving income and expenditure into a different year if their tax bands have fluctuated.
This is scratching the surface of this tax area, but one final point to note is that, if you change the basis that you calculate rental profits, specific provisions apply to ensure that no income or expenditure is missed or double counted as a result of the change. Here, it would be a good idea to consult your tax adviser or accountant to ensure this is correctly recorded. In fact, it would be recommended to discuss your position on the whole with your tax advisor, to make sure you have selected the method – accruals or cash basis – which suits your circumstances best.
For any of your property tax needs, please do not hesitate to contact RITA4Rent today on Freephone 0800 1 22 33 57 or via email by clicking here.
- We recommend all professional landlords protect themselves and their business by gaining access to advice, information and education from a landlord association. Become a member of the Residential Landlords Association (RLA) today and join over 35,000 other landlords, just like you. Click here to become a member of the RLA today.
- Given the sheer level of tax changes in recent years, it might also be a good time to review your mortgage position. Please note we are not authorised to provide advice or arrange mortgages but we can introduce you to a firm who can. If you wish to discuss your policies or receive advice then please contact us and we will pass your details onto RLA Mortgages who are authorised and specialise within this area.
- propertychecklists.co.uk has been set up by Which? property author Kate Faulkner and offers checklists on everything from how to choose a buy to let through to securing tenants, letting them go and day-to-day management. If you have a question and want an independent answer, they will also help with that too – all free of charge!
- Finally, it can also be a great help communicating with like-minded landlords, learning about their experiences, and having a chat. You can do just that by heading over to Property Tribes today, the busiest forum for private and residential landlords in the UK.