A guide to cash basis for landlords

A guide to cash basis for landlords
7th August 2023

The following guidance is of a general nature and must not be relied on, advice should be sought from your professional tax adviser in relation to your specific circumstances.

Since 2017, certain landlords have been required to report their rental income and expenditure on a ‘cash’ basis.

Prior to this, landlords reported rental profits on an accruals basis meaning income ‘earned’  in the period was recognised regardless of when payment was received.

The cash basis concentrates only on cash received and cash paid out in a given period, for the smaller property business.

Where landlord’s undertake the services of a letting agent, it is the landlord’s responsibility to disclose accurately the rental profits received in any given tax period to HMRC and pay the correct amount of tax owed. This is regardless of when rental payments are remitted to them by their letting agent.

Can landlords elect to ‘opt’ out of the cash basis?

Where Landlords prefer to continue to be taxed on an accruals basis they can simply elect out of the cash basis via their respective self-assessment tax return. It would be necessary to elect out of the cash basis annually.

HMRC guidance may be found here.

Which rental businesses have HMRC applied the cash basis by default?

Unincorporated businesses ie those where a person (but not a company) has receipts of less than £150,000 per annum are automatically enrolled on the cash basis.

The following 2 main exclusions apply to the cash basis-

  1. Where the business is carried on at any time in the tax year by:

(a)        a company;

(b)       a limited liability partnership, (which is legally, a body corporate);

(c)       any other partnership, where any partner is not an individual; or

(d)       the trustees of a trust;

  1. The annual gross receipts in the year exceed £150,000 (reduced on a pro-rata basis if the business is carried on for part of the tax year).

The £150,000 limit applies separately to each property business (UK & overseas)

Which expenses can landlords claim under the cash basis?

Under the cash basis deductions are allowed for certain revenue and capital expenditure (with extensive exceptions) incurred ‘wholly and exclusively’ in the business similar to the accruals basis.

Broadly, deductions for expenditure of a capital nature are allowed for depreciating assets (those with an expected life of 20 years or less) that are not used in connection with the provision, alteration or disposal of land; cars; financial assets; businesses themselves; or education and training.

Replacement domestic items relief may be claimed on certain capital domestic items provided solely for the tenant’s use.

Landlords using the cash basis may make deductions for interest paid on loans on a similar basis to landlords using the accruals basis.

Property let jointly

Joint owners (who are not spouses or civil partners) of property are free to make separate decisions how to calculate their rental profits, the eligibility of each individual for the applications of the cash basis will be considered separately.

Where landlords use letting agents, when is the rental income taxed on a cash basis?

Landlords are taxed at “the date the letting agent receives the rent from the tenant” on the landlord’s behalf, not when the landlord receives the rent from the agent.

It is the landlord’s obligation to disclose the correct amount of rental profits they receive in any given tax period and pay the correct amount of tax owed to HMRC.

Security deposits and bonds

Security deposits are held on the tenant’s behalf. Under the cash basis, there will be no requirement to account for the security deposit when it is received. The landlord will only need to account for any element of the security deposit retained once it has been established that the retained element is legally the landlord’s property.

The information on this web site is of a general nature. It is not a substitute for specific advice in your own circumstances. Advice should be sought from a professional tax adviser before you take any action or refrain from action.

Whilst we endeavour to use reasonable efforts to furnish accurate, reliable and, error free up-to-date information, we do not warrant that it is such. We and our associates disclaim all warranties.

The information can only provide an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation and/or seeking professional advice.

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