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HMRC internal manual

Property Income Manual

Cash basis for landlords: overview

Overview

The cash basis is a simpler way of reporting the profits or losses of a property business. It is used as an alternative to calculating them in accordance with generally accepted accounting practice (GAAP). From the 2017-18 tax year, it will be the default basis for most property businesses that are run by individuals or partnerships with income for the tax year of £150,000 or less.

Under the cash basis, property business income and expenses are accounted for when money is received or paid, not on the date the income is earned or expenses incurred. So instead of preparing a balance sheet and profit and loss account, the business records only need to show money when it comes in or goes out.

As receipts are recognised as income of the period in which the money is received and expenses are outgoings of the period in which the money is paid, there is no need to account for debtors or creditors.

The profit or loss to be reported under the cash basis is found by calculating:

The total amount of receipts that the business received during the tax year

less

The total amount of expenses that the business paid during the tax year

subject to any adjustment required or authorised by law in calculating profits for income tax purposes.

Eligibility

Commencing from the 2017-18 tax year, the cash basis will be the default way of reporting the profits or losses of a property business. However, profits or losses of a tax year must instead be calculated in accordance with GAAP in a tax year in which any of the following criteria is met:

  • A: The property business is run by a company, limited liability partnership (LLP), trustees or a corporate firm (a partnership with at least one non-individual member).

  • B: Receipts that would be brought into account under the cash basis for the tax year exceed £150,000. This amount must be proportionally reduced if the property business is only carried out for part of the tax year.

  • C: If the property business is being carried on jointly with a spouse or civil partner, the same basis must be used by both individuals, unless they make a declaration under S837/ITA 2007 that they are beneficially entitled to the income in unequal shares.

  • D: Business premises renovation allowance (CA45100) has been claimed, and a balancing event in the tax year gives rise to a balancing adjustment.

  • E: An election is made to use GAAP because the person believes that traditional accounting is more appropriate. The election must be made within one year of the filing date for that tax year.

In short, cash basis is the default for individuals and partnerships made up only of individuals if their cash basis receipts do not exceed £150,000, unless:

  • They carry on the property business jointly with their spouse or civil partner and their spouse or civil partner uses, or is required to use, GAAP.

  • There is a balancing adjustment under the business premises renovation allowance in the tax year.

  • They make an election to use GAAP within one year of the filing date.

Rent-a-Room Relief

Rent-a-room relief (see PIM4000 onwards) is available where a person calculates the profits of their property business using the cash basis as it is under GAAP. 

Under the cash basis it is the total amount of rent-a-room receipts recieved (including capital receipts that are brought into account under the cash basis rules), rather than owed, during the tax year that must be used to determine if receipts are above the exemption limit. 

Furnished Holiday Lettings

The rules for furnished holiday lettings (see PIM4100 onwards) apply when using the cash basis as when using GAAP.

However, the special rules for capital expenditure differ between GAAP and cash basis. When calculating profits of a furnished holiday let using GAAP, capital allowances can be claimed for capital expenditure on plant and machinery (e.g. furniture). When the cash basis is used, the full amount of capital expenditure can be deducted from the profits of the tax year when the expenditure is actually paid.

Loss Relief

Losses arising from a property business can broadly be relieved in the same way under the cash basis as under GAAP.

However, no relief is available for the losses of a property business calculated under the cash basis against general income (sideways loss relief). This includes the property businesses of partnerships.

Capital Gains Tax

Chargeable Gains Tax may be due when there is a gain on the disposal of an asset.

Under the cash basis, there is deemed to be no chargeable gain on the disposal of an asset or an interest in an asset if the following conditions are met:

  • The asset is not land

  • The asset has at some time been used in the property business

  • The capital receipt is brought into account under cash basis