Cash basis rules for property businesses
If you're a landlord it's important to be aware of the cash basis rules for property businesses. These new rules were introduced in April of last year as part of an earlier consultation by HMRC.
When the cash basis rules for property businesses applies
By default the cash basis rules for property businesses will apply to small unincorporated property businesses.
You won't be able to use the cash basis rules in the following circumstances:
What are the cash basis rules for property businesses?
The cash basis rules state that rental income is accounted for when it is actually received (rather than when it is due). Any expenditure incurred is only accounted for when it is actually paid. They are similar to the cash basis rules for sole traders and partnerships.
There are some adjustments which may impact on how property income is calculated. These are as follows:
You can't apply the cash basis to premiums that are granted for a lease of less than 50 years or for any work carried out by tenants in lieu of this type of premium. Additionally there are certain other types of payment connected with the grant or assignment of a lease which also don't qualify.
Loan interest and the cash basis rules for property businesses
If you're using the cash basis you'll be able to deduct interest on loans in the same way as those landlords that use the accruals basis. However, there will be a new restriction on interest where the value of the loans in your property business is greater than that of your properties.
The usual restrictions for deduction of loan interest on mortgages which relate to residential property will still be applicable.
Capital expenditure and the cash basis rules for property businesses
Just like traders you won't be able to claim capital allowances if you're a landlord using the cash basis, except where it relates to the purchase of a car.
Instead you'll be able to claim the upfront cost of eligible capital items used in your business.
The following are regarded as non-qualifying capital expenditure:
An asset is regarded as a depreciating asset (see above) if it's reasonable to expect that it's useful life lasts less than 20 years or alternatively it's value has declined by 90% or more at the end of this period.
There are also rules to restrict capital expenditure where a business includes residential property which is a mixture of furnished holiday and non-furnished holiday lettings.
Election for accruals rather than cash basis rules for property businesses
You have to submit an election to apply the accruals basis within one year of the normal self assessment filing date.
If you have a mixture of different property businesses - for example both UK and overseas property businesses then you can make a separate decision for each property business.
If you own let property jointly you can make a separate decision as to whether to apply the cash basis or accruals basis. The only exception is where you are husband and wife or civil partners. In this case, you both have to apply the same basis.
For more useful information, check out our Ebooks here.
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