Yet more new rules
The tax position for landlords has become more complex and tough in the last few years. One change which, we suspect, many will have overlooked is the imposition of the cash basis for working out profits for 2017/18 and subsequent years. This affects most landlords who are individuals, but not those who are companies, limited liability partnerships or trusts. It applies to commercial and residential lets.
When does the cash basis apply?
The cash basis automatically applies to individuals who receive rents (before expenses) of £150,000 or less per year. This is the reverse of the rules which applied prior to 2017/18. Until then, as a landlord you were required to work out your profits using normal accounting rules. The transition from one basis to the other requires special adjustments.
Tip. You can elect for the cash basis not to apply. This will avoid having to make the adjustments that are required because of the change (see The next step ).
Cash basis v normal accounting rules
As the name suggests, the cash basis means that you work out your profit taking account of rents etc. you’ve received and expenses you have paid. Profit using the normal accounting rules is worked out on rent receivable by you and expenses payable. So, as a rule of thumb, if your tenants are often in arrears with rent while you pay your bills on time, the cash basis will work well for you. But if the circumstances are reversed then the normal accounting basis is probably your best option.
Trap. If you elect to use the normal basis, it only applies for one year. If you want to continue on the same basis you must make an annual election.
Example. Jim lets out a shop for £2,000 per month payable in advance on the first of every month. When he prepares his 2017/18 tax return Jim must ensure the correct rents and expenses are reported. The £2,000 rent he received for April 2017 didn’t show in his accounts for 2016/17 because it related (except for a few days) to 2017/18. But because he received it on 1 April 2017, it won’t show in his cash basis accounts for 2017/18. Jim must make an adjustment by adding the £2,000 rent received on 1 April 2017 to what he receives in 2017/18. He might need to make similar adjustments for expenses he pays in advance, e.g. service charges, or he’ll miss out on tax deductions.
Other adjustments might be required as a result of the switch to the cash basis. The most significant of these is for expenditure on equipment etc., which would have qualified for capital allowances under the normal rules, and interest on loans. The amount of tax relief for these can be permanently lost or gained; it’s not just the timing (see The next step ).
Tip. When completing your 2017/18 tax return review the adjustments required. You can then decide if you would be better off electing to stick with the normal basis.