Cash basis rules for property businesses

If you're a landlord it's important to be aware of the cash basis rules for property businesses. These new rules were introduced in April of last year as part of an earlier consultation by HMRC. 

cash basis rules for property businesses

When the cash basis rules for property businesses applies

By default the cash basis rules for property businesses will apply to small unincorporated property businesses.

You won't be able to use the cash basis rules in the following circumstances:

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    You have elected to use the accruals basis as an alternative
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    The cash receipts from your property business are over £150,000 in a tax year
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    You are one of the following:
  •  A company
  • An LLP
  • You have elected to use the accruals basis as an alternative
  • A partnership with at least one corporate member
  • A trustee or personal representative
  • You jointly own a property with a spouse/civil partner and they have elected for the accruals basis
  • You have claimed business premises renovation allowances and a balancing adjustment would arise in the tax year.

What are the cash basis rules for property businesses?

The cash basis rules state that rental income is accounted for when it is actually received (rather than when it is due). Any expenditure incurred is only accounted for when it is actually paid. They are similar to the cash basis rules for sole traders and partnerships

There are some adjustments which may impact on how property income is calculated. These are as follows: 

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    A deposit given by a tenant as security will only be accounted for once it is confirmed that it will not be refunded.
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    If you use a letting agent to manage your property then the rents will be treated as received when they receive it: not when it is passed to you.
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    There are special rules for interest and capital expenditure  - see below

You can't apply the cash basis to premiums that are granted for a lease of less than 50 years or for any work carried out by tenants in lieu of this type of premium. Additionally there are certain other types of payment connected with the grant or assignment of a lease which also don't qualify.

Loan interest and the cash basis rules for property businesses

If you're using the cash basis you'll be able to deduct interest on loans in the same way as those landlords that use the accruals basis. However, there will be a new restriction on interest where the value of the loans in your property business is greater than that of your properties.

The usual restrictions for deduction of loan interest on mortgages which relate to residential property will still be applicable.

Capital expenditure  and the cash basis rules for property businesses

Just like traders you won't be able to claim capital allowances if you're a landlord using the cash basis, except where it relates to the purchase of a car.

Instead you'll be able to claim the upfront cost of eligible capital items used in your business.

The following are regarded as non-qualifying capital expenditure:

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    The acquisition or disposal of a business, or part of a business
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    Education or training costs
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    Any asset that is not a ‘depreciating asset’ (see below)
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    Any asset not acquired or created for use on a continuing basis in the trade
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    Land (except for the provision or installation of depreciating assets in non-residential properties)
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    Intangible assets expected to last over 20 years
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    Financial assets

An asset is regarded as a depreciating asset (see above) if it's reasonable to expect that it's useful life lasts less than 20 years or alternatively it's value has declined by 90% or more at the end of this period.

There are also rules to restrict capital expenditure where a business includes residential property which is a mixture of furnished holiday and non-furnished holiday lettings. 

Election for accruals rather than cash basis rules for property businesses

You have to submit an election to apply the accruals basis within one year of the normal self assessment filing date.

If you have a mixture of different property businesses - for example both UK and overseas property businesses then you can make a separate decision for each property business.

If you own let property jointly you can make a separate decision as to whether to apply the cash basis or accruals basis.  The only exception is where you are husband and wife or civil partners. In this case, you both have to apply the same basis.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

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