Government changes 'to make tax calculations simpler for landlords'

Fri 07 Oct 2016

As part of the 2015 Budget the government committed to transforming the tax system through digital technology, which will require the simplification of some of the rules. On 15th August 2016 a consultation was issued in respect of unincorporated property businesses. The cash basis rules have already been introduced for unincorporated self-employed trading businesses and so the government will be looking at methods to apply these ideas to unincorporated property businesses going forward.

At present property businesses must recognise income earned and expenses arising in the tax year, as opposed to cash received and paid. Designed with the simplest property businesses in mind, the proposal to extend the cash basis to unincorporated property businesses will give landlords the option to be taxed on a cash basis as opposed to the current method. The consultation predicts that over 2.5 million property businesses could benefit from this, however, it may not be suitable for larger property businesses and accruals accounting would continue to be available if preferred.

The new approach would apply to both individuals and partnerships but companies, trusts and other property structures would not be able to use this simplified method.

With the introduction of digital tax returns, it is anticipated that property businesses will soon be required to report on a quarterly basis, as opposed to an annual submission. Quarterly reporting will not be required of landlords with an annual business income of below £10,000. They could still benefit from the cash basis, however.

The cash basis will calculate taxable profits based on a business’s cash flow, but will not alter the underlying principles of what expenditure is allowable in calculating your taxable profits. By adopting the cash basis, it will simply change the timing of the income and deductions from expenditure that is exclusively incurred by the property business.

Unlike other unincorporated trading businesses, the profit made on any rental business needs to be recognised on a tax year basis, as opposed to a different accounting year. Therefore, landlords will have to look at the cash movement in the tax year when determining what their tax liability will be.

Trading businesses are only eligible for the cash basis if their total trading cash receipts are below the VAT threshold at the end of the tax year. The government has suggested that it is not intending to impose a maximum limit on the entry of the cash basis for landlords. It is also not proposed that the two streams of income will be combined when considering eligibility.

From April 2017, the new mortgage interest relief rules will still apply even if a landlord decides to opt into the cash basis for their residential property business. Furnished residential property that is not considered a holiday let will still be applicable for replacement furniture relief.

Overall the proposed changes seem to be an encouraging step in making a landlord’s tax position simpler to calculate and it is also envisaged that non-UK resident landlords will be eligible for the cash basis.

The closing date for comments on the consultation is 7th November 2016.

For guidance on how your property business will be affected by this change, please contact Jo White at call 01403 253282 or visit