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HMRC internal manual

Property Income Manual

Use of trading income rules: splitting receipts and expenses between years

As of 2017-18 the cash basis is default method of reporting profits or losses of a property business for most individuals or partnerships with cash receipts for the tax year of £150,000 or less. For further information please refer to PIM1090.

The general rules for those not using the cash basis are set out below, this includes the method of allocating rental business receipts and expenses to the correct tax year. In brief, the principles that apply to a trade also apply to a rental business.

When are receipts included in the profit and loss computation?

Receipts are recognised in accordance with normal accountancy principles. This means that a customer includes all incomings earned in the tax year regardless of when they are due or when they are received. For a trading or professional partnership it is normally the incomings of the accounting period ending in the tax year that are included, not the year to 5 April (PIM1040).

Rent is not brought into a year’s tax computation merely because it is received in the year or because it is due to be paid in the year. Equally, rent is not excluded merely because it is received outside the tax year or it is due outside the tax year. The proportion of the rent which is earned in the year from the tenant’s use of the property in the year should be brought into the profit and loss account and the proportion which is earned from the tenant’s right to use the property outside the year should be excluded.

Where, therefore, a lease provides that rent is payable in advance:

  • include the proportion of any rent due before or during the tax year which relates to use of the property during the year, and
  • exclude the proportion which is for the use of the property for a period outside the tax year.

Where rent is payable in arrears the same principles apply in reverse:

  • include the proportion of any rent due during or after the tax year which is for the use of the property in the tax year, and
  • exclude the proportion which is for the use of the property for a period outside the tax year.

Bad debts

It follows that receipts may need to be brought in before they have been received in cash. Don’t exclude receipts merely because they have not actually been paid by the year end or because the debt may be bad. But you can, as a separate matter, deduct as an expense the amount of any receipt which has been included in the profit or loss computation and which is genuinely bad or doubtful. There is more about bad and doubtful debts at BIM42700 onwards.

When are expenses included in the profit and loss computation?

Expenses are also brought into the tax computation using normal accountancy principles and are the converse of the approach to receipts. This means that you deduct any allowable expenses (PIM2000 onwards) which relates to work done for the rental business, or goods and services supplied to the rental business, for a particular tax year to 5 April. For a trading or professional partnership you will normally look at the expenses of the accounting period ending in the tax year, not the year to 5 April (PIM1040).

It does not matter whether a bill is paid before or after the end of the tax year. But, obviously, only genuine business expenses can be deducted. A person can’t, for example, claim a deduction for an uncommercial expense, which they never intend to pay.

There are also special rules for the payment of salaries and wages to employees. You can only deduct amounts actually paid in the tax year or within nine months of the end of it (see BIM47130).

Interest Restriction

For tax years 2017/18 to 2019/20, there are restrictions on the extent to which interest and other finance costs payable on loans to buy residential let properties may be deducted in computing the profits or losses of a property rental business for income tax purposes. From 2020-21 onwards, no deduction is allowed in calculating the profits.  For further information see PIM2100 onwards.