For returns from the period beginning 6th April 2013 a voluntary form of cash basis accounting was introduced but only for unincorporated trading businesses with turnover under the VAT threshold. Until 6 April 2017 landlords were required to use accruals accounting for property income.
From 6 April 2017 the tables are turned as smaller unincorporated property businesses are required to use a form of cash basis accounting. The landlord can opt to use the cash basis for one property business and not for another different and separate property business. Say the landlord has some property let as furnished holiday lettings, and other property let as normal residential lettings, the furnished holiday lettings accounts could be drawn up on an accruals basis and the other lettings on the cash basis.
The following unincorporated landlords are not permitted to use the cash basis:
- those with annual turnover exceeding £150,000;
- where business premises renovation allowance has been claimed and there is a balancing adjustment in the year;
- LLPs, trustees, personal representatives or partnerships including a corporate member;
- where the property is jointly held by spouses/ civil partners and one person does not use the cash basis.
If the landlord doesn’t fall into one of the exemptions listed above, he can opt to use accruals accounting by electing in his tax return for the relevant tax year, or by the deadline for amending that return: 31 January 2020 for the 2017/18 returns.
The cash basis for property business differs from the cash basis for trading businesses on these points:
- security deposits are not counted as income while the funds are available to be returned to the tenant.
- the cost of replacing domestic items in residential properties may be deducted, but not the cost of the original items.
- interest and finance costs are not capped at £500 per year.
Finance costs are capped under the cash basis for property businesses, but the disallowed charges are based on the portion of loans which exceed the value of the let properties when they were first let by that landlord. This cap applies before, and in addition to, the restriction of deductions for finance charges relating to letting of residential property, which is phased in from 6 April 2017.
Further guidance for landlords can be found on HMRC’s website