Cash Basis for Landlords – When Does It Apply?

Cash Basis for Landlords

The cash basis for landlords has become confusing for many landlords and property owners. The primary reason behind this confusion is the alteration in the mode we calculate the profit and loss during a tax year.

Generally, everyone is supposed to prepare their profit and loss statements according to the Generally Accepted Accounting Principles (GAAP). In GAAP, people make their statements of financials on an accrual basis instead of a cash basis.

A cash basis is apparently more convenient and seamless as compared to an accrual basis. So, it is easier and quicker to calculate the profit and loss when you have actually realised them, rather than add details for the invoices you are due to receive or pay in a tax year.

In this blog, we will discuss the cash basis for landlords and how it affects their profits, losses and allowances. Moreover, we will discuss how they can opt-in and opt-out of the cash basis introduced by the HMRC with the aim to make the UK under their initiative of Making Tax Digital. So, let’s start!


The cash basis might confuse many landlords after the HMRC changed the tax system on rental income. Seek help from our accredited tax advisors at AccountingFirms.


Cash Basis Vs. Accrual Basis

The difference between cash basis and accrual basis can only be described as the way a company calculates their annual accountings. On a cash basis, a company manager calculates the money received or incoming income when it has been received. Moreover, it also calculates the outgoing or paid money to another organisation when it has been actually paid.

On the other hand, the accrual system allows the calculation of all those payments and receipts not actually been realised. In other words, all the money is expected to receive or made payment on a later date. The accrual basis requires more adjustments than the cash basis system.


What is Simplified Cash Basis for Unincorporated Property Businesses?

In August 2016, HMRC published a document in an attempt to make the tax administration more convenient and seamless. For this, they introduced the apparently ‘Simplified’ cash basis for the unincorporated property businesses.

What does ‘‘Unincorporated Property Businesses” mean? Unincorporated businesses are those businesses in the property sector where the annual turnover is less than £150 000 and their profits are calculated on the basis of the whole business and not on a business-by-business basis.

Simply put, the property will consider all the property units as one and then will calculate the profit on them as a whole. There’s no need to prepare a separate balance sheet for each business. As a result, the landlords cannot make a claim for one property as their loss is offset by the profit gained on another property business.


Who is Eligible for the Cash Basis?

The eligibility criteria as described in the amendment made on April 6, 2017, specify the following:

  1. An individual person lets out property alone or with their partners, spouse or a civil partner. The limited companies, LLP and trust are not eligible for this system of cash.
  2. The rental income is less than or equal to £150 000. If the rental income exceeds this threshold, the accrual system will be used.
  3. A property jointly shared by the spouses or civil partners has to opt-in jointly for the cash basis. Otherwise, they have to use the accrual basis for calculating their revenues if one of them has opted out of the cash basis.
  4. The default system is the cash basis for all of the properties mostly. However, you can elect out of this system and go for the accrual-based system.


How the Losses are Treated Under the Cash Basis for Landlords?

The losses are treated differently under the cash basis for landlords. For example, the accrual or GAAP rule defines the losses as being claimed later after they have been incurred. Conversely, the property losses are carried forward and offset by the future rental income or profits. The reason behind this is that the cash basis takes into account all the businesses as one unit. Another property business of the landlord balances out the losses from one business. So, there’s no need to claim the losses separately for each property.


How To Deal With the Payments Through Letting Agents?

HMRC has defined the income owed to the letting agents and the receipts due from the letting agents. Simply, they are calculated and counted when the letting agent has received or paid the dues, rather than when the landlords receive or make a payment.


Security Deposits and Cash Basis

Another important factor to consider on a cash basis is security deposits. The security deposits are held on behalf of the tenants instead of the landlord. The landlord is able to use the security deposits once the property has been legally transferred to them.


Capital Expenditures Under Cash Basis System

The distinction between capital expenditures and revenues has been removed under the cash basis system. The capital expenditures are deducted entirely and 100% of the rental income simultaneously when these expenditures are incurred.


The Bottom Line

We conclude the discussion about the cash basis for the landlords with the ending note that it is a system used by property businesses with a property income of less than or equal to £150 000. Once your rental income is above this threshold, you will automatically be on an accrual basis.

On the other hand, you have to choose to opt in or opt-out of the cash basis system. This system allows the removal of the distinction between capital expenditures. One thing to remember is to keep accurate details with you about all of your cash-based transactions to avoid any inconveniences later about the cash basis for landlords in the UK.


Let’s settle all your tax complications and problems by getting the right tax advice from professional tax experts at the right time at the AccountingFirms. Contact us now!


Disclaimer: All the information provided in this article on Cash Basis For Landlords, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.