One of the changes that is being brought in under HMRC’s ‘making tax digital’ (MTD) strategy is that both businesses and landlords will need to keep digital records and provide quarterly updates. To make thing easier, various initiatives are being introduced, one is to consider moving certain landlords to cash basis accounting.
The availability of the cash basis to unincorporated property businesses has been extended along with a maximum rental income of £150,000 per property business.
One of the HMRC documents published back in August 2016 was ‘Simplified cash basis for unincorporated property businesses’. This would only apply to the simplest of property businesses and would allow them to calculate their taxable profits on a ‘cash in cash out’ basis. At present, the current standard looks at income earned and expenses incurred for the accounting period, regardless to whether the cash has been paid out or received. The cash basis option has been in play since 2013, only being available to small eligible trading businesses. Recording transactions will become easier together with a reduction of accounting adjustments, when moving to a cash basis.
Cash basis accounting would only be applicable whereby a person (not a company) receives income from a property.
What is the maximum limit?
From 2017 the cash limit for traders was increased to £150,000 and this applied to unincorporated property businesses too, becoming the default basis. Property businesses whose receipts total £150,000 or less will automatically use the cash basis, unless they choose not to.
Whereby an individual owns more than one property business, the legislation allows the £150,000 limit to apply separately to each one.
Although joint owners will be given the opportunity on how to calculate their profits (the eligibility of each individual for the application of the cash basis will be considered separately), the exception will be when a property is jointly owned by a husband and wife or by civil partners, both will need to apply the same basis when calculating their profits. This is to follow on from the current legislation, which treats the income from jointly owned assets to be split in a 50:50 ratio.
Relief for loan and finance costs will be calculated in the same way with the same restrictions whether using the cash basis or the accruals basis.
Premiums and leases
An income tax charge along with a capital gains tax charge is currently applicable when a landlord receives a premium for granting a lease of less than 50 years, or where the tenant may carry out work in lieu of the premium. The new legislation proposes that landlords will not be able to apply the cash basis or allow any deductions for those who have made payments or have an agreement in place for work in lieu.
At present when a property is let using a letting agent, the date that the letting agent receives the money from the tenant, is the date used for receipt for the cash basis, not the date that the landlord receives the money from the agency. Because this doesn’t follow the simplification theme that the cash basis offers i.e.: cash in cash out, (the owner may not know what expenses are going in or out until receiving the statement from the agency), HMRC has said that clarification will follow in the guidance materials that will be published following the legislation.
When a landlord receives a deposit from a tenant, it will not be necessary to account for it as it is held on behalf of the tenant. The exception would be, if any part of the deposit was kept by the landlord and this would only come into force once it legally became the landlord’s property.