As we approach the 2017/18 tax return season, it is worth recalling that it is the first tax year in which the cash basis applies by default to unincorporated property businesses with annual rental income of less than £150,000. This figure should be adjusted pro-rata if the business has only operated part way through the year.
The cash basis, as the name suggests, works out the taxable profits on a ‘cash in-cash out’ basis. Up until 6 April 2017, individual landlords were required to declare their rental income and expenses on an accruals basis under Generally Accepted Accounting Practice (GAAP), which matches income and expenditure to the accounting period/tax year to which they relate. The fact that the rents were not actually received during that particular period would be irrelevant.
For most individual landlords the two usually give rise to identical results, but disparities can arise when payments from tenants are late. For example, in a situation where a tenant has not paid their rents (£1,000/month) for three months, the landlord would have been taxed on £12,000 under the accruals basis, even though they technically only received £9,000. The disparity now disappears under the cash basis.
Landlords who do not wish for the cash basis to apply have to opt out annually on their tax returns by the one-year anniversary following the 31 January Self Assessment deadline. For landlords with separate property businesses – one letting out UK property and the other letting out foreign property for instance – they can opt out of one but not the other should they so wish. However, all UK lettings are treated as one business so it will not be possible to opt out on a property-by-property basis.
If the property business is owned jointly, joint owners can make separate decisions as to how to calculate their profits (although in practice most joint owners will choose to work on the same basis for ease of administration). The only exception to this rule is if the property business is being carried on jointly with a spouse/civil partner. For such cases, the same basis must be used by both individuals, unless a declaration is made that they are beneficially entitled to the income in unequal shares.
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