Residential Property Issues for Landlords – Part Two

Continuing on from our blog of 15 August 2018, here are some further changes that came into effect on 6 April 2017, and which you will need to consider when providing information for/completing your tax return for the year ended 5 April 2018:

Cash Basis

Traditionally, rental income and expenses have been declared on an “accounts basis” i.e.:

  • Rental income due for the year – rental income is usually payable in advance so an adjustment had to be made for the part of the rents received that were applicable to the following tax year
  • Less expenses applicable to the year – similarly expenses such as insurance which are paid in advance had to be apportioned between tax years.

From 6 April 2017 the simplified cash basis will apply for most property businesses that are run by individuals or partnerships. The profit or loss to be reported under the cash basis is:

  • The total amount of income received during the tax year
  • Less allowable expenses paid during the tax year

The cash basis does not apply if:

  • The property business is run by a company or limited liability partnership (LLP), or
  • Receipts that would be brought into account under the cash basis for the tax year exceed £150,000. This amount must be proportionally reduced if the property business is only carried out for part of the tax year, or
  • An election is made to use Generally Accepted Accounting Practice (“GAAP”) because the person believes that traditional accounting is more appropriate. The election must be made within one year of the filing date for that tax year.

Transitional adjustments are required in the tax year in which the cash basis is first applied if:

  • The business had debts owed to it by tenants at the end of the previous tax year
  • The business owed money to suppliers at the end of the previous tax year
  • Accounting adjustments were previously made for accruals
  • The business had unrelieved qualifying capital allowances

Property allowance

With effect from 6 April 2017 a new property allowance of £1,000 was introduced. If an individual’s gross rental income is £1,000 the income is not charged to income tax and they have no obligation to notify HMRC if this is a new source of income.

If the gross income exceeds £1,000 the individual has the option to claim the £1,000 allowance as a deduction.  They cannot also deduct any expenses of either property business that would otherwise be allowable.

Use of the property allowance is optional, and it may not suit an individual’s circumstances, for example if a property business is loss making. If an individual does not want to use the property allowance, he or she should make an election for full relief not to apply and calculate their profits using the normal rules and complete their Self-Assessment tax return in the normal way.

The property allowance does not apply where rental income is received from:

  • A connected employer
  • A connected firm
  • A connected close company

If you would like to discuss the blog in more detail please email Gary Plumb or call 0115 9721050.

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