With effect from 6 April 2017 (individual) landlords have been required to report their rental income and expenditure on a cash basis. Prior to this, landlords had to report their rental profits on an accruals basis unless their gross receipts did not exceed £15,000.
Under the accruals basis, a landlord has to recognise the income that is due to them and the expenses that relate to the tax year under review, irrespective of whether or not the income has been paid or the expenses met. This is different to the cash basis which means you only recognise the income and expenditure when it is physically received or incurred.
From 6 April 2017 the cash basis must be used unless:
• The property business is carried on by a company, an LLP, a partnership with a corporate member or a trust
• The gross property income exceeds £150,000 for the tax year
• If the property is owned jointly by spouses or civil partners, where one has made an election to account for the income on an accruals basis
• You make an election not to use the cash basis
The date in which income is received when letting your property through a letting agent is deemed to be when the letting agent receives the rental income, not the landlord.
Under the cash basis, the receipt of a tenancy deposit should, strictly speaking, be treated as income in the tax year it is received. However, HMRC recognise that this is unfair and instead only the amount retained at the end of the tenancy is taxed as income under the simplified cash basis.
Under the simplified cash basis, the capital / revenue divide is removed. Instead, all expenditure, even capital expenditure, incurred wholly and exclusively for the purposes of the property business is allowed as a deduction from income unless it relates to a number of types of expenses, the most common ones being:
• acquisition or disposal of a property business or part of a property business
• education or training
• provision, alteration or disposal of land
• provision, alteration or disposal of cars
It is important to note what capital expenditure has been deducted against your rental income as if you later receive any money for this, i.e. you sell it or you receive insurance proceeds then this income also needs to be recognised.
Finance costs are deductible on a paid basis but where you have interest and arrangement fees relating to residential letting then you will be subject to the new mortgage interest relief restrictions on these costs which came into effect on 6 April 2017 also.
When preparing your 2017/18 Tax return care needs to be taken to ensure you do not double count any income and expenditure. Switching between the accrual basis and cash accounting can mean that income and costs received/ incurred in this tax year were already recognised in 2016/17.
For specialist tax advice please contact Kreston Reeves.
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