Property landlord changes from 2017/18 – Cash is King

 

We have seen a number of tax changes affecting property landlords, largely reducing tax reliefs and putting more pressure on the commerciality of their property rental businesses. See our earlier blog here for more information.

The 2016 Budget contained a change that came into force from April 2017, changing the way rental profits are calculated. As we approach the beginning of the 2017/18 Self Assessment tax return season, it’s important to highlight this.

Accruals v Cash basis

In previous years, landlords calculated their rental accounts using the accruals basis, including income and expenses as they are due to be paid, even if that money hasn’t yet come in or gone out.

The cash basis is perceived to be simpler, as it recognises income only when it is received, and expenses when they are paid. For example, if at the end of the tax year, a tenant still hasn’t paid their March rent, it will not be included as taxable income for that tax year. Conversely any rent paid in advance will be taxable when received, rather than spread over a number of months. These same principles apply to expenses.

What has changed?

On the forthcoming 2017/18 tax returns, HMRC will now assume that rental accounts are prepared on the cash basis by default. If a landlord prefers to use the accruals basis they still can, but they must elect to do so. Without making the election, and continuing to submit rental accounts on the accruals basis, tax returns will be wrong.

Which should I use?

This mainly comes down to preference, and whichever basis makes collating the rental accounts easiest for you. Over the life of the rental business the total profits arising will be the same, but different amounts of profits will fall into different tax years. Typically such ‘timing differences’ are small.

However, there are always extremes; in some scenarios picking the right basis can be a tax planning matter. Take the example of a tenant who pays rent, up front, for lengthy periods in advance. That landlord would be unlikely to want to use the cash basis, as those receipts will fall taxable sooner, and bring tax bills forward.

No doubt there will be some taxpayers who fit this scenario, but who simply carry on submitting their rental accounts as previously, unaware that an election is required to keep using the accruals basis. Their returns may unwittingly be under-declaring rental profits, potentially by thousands of pounds.

Complicated Simplification?

Some suggest this attempt at ‘tax simplification” by HMRC is unhelpful and will increase errors on returns. These new rules work the opposite way around to trading businesses. So a taxpayer who is both self employed and a landlord, and wishes to prepare his accounts in the same way for both, will need to make at least one opt-in or one opt-out decision.

As always with tax, there are additional complexities, including: how jointly owned properties are dealt with, adjustments required when switching basis, and an upper rental income cap on who can use the cash basis. If you want to be sure your rental accounts are fully compliant and complete with all available expense claims, please get in touch at hello@garbutt-elliott.co.uk – 01904 464 100.