At present, landlords are required to comply with GAAP and use accruals based accounting. This consultation seeks to extend cash basis accounting to these unincorporated property businesses. There is no proposal for a turnover threshold limit like for businesses. Rather it is intended that the cash basis will be available to only simple property businesses carried on by an individual or a partnership of individuals. How this will be defined remains to be seen. The consultation discusses transitional arrangements between the accruals and cash basis accounting to ensure income is only taxed once. It is estimated that up to 2.5 million property businesses would benefit from this change.
Under these rules, landlords will only pay tax on rent actually received from the tenant and only money actually paid out will be treated as relievable. It is expected the existing cash basis rules used for trading income will apply.
Capital v Revenue
The outcome of the consultation on simplifying tax for unincorporated businesses and the distinction between capital and revenue will be applicable here. However, the outcome of that consultation will be subject to existing rules specific to landlords, such as relief only being available for furniture and household appliances when they are replaced but not when initially acquired.
Under the cash basis rules there is a restriction on relievable finance costs to a maximum of £500. For unincorporated property businesses it appears that this restriction will also apply, which could be a material point for landlords considering using the cash basis. We await further detail on what is intended here.
It is intended that no sideways relief will be allowed for losses calculated on the cash basis. The losses will only be capable of being carried forward to offset future rental income. This also will need to be considered by those thinking of moving to the cash basis as, in certain circumstances, losses calculated under the accruals (GAAP) basis are available to offset against other income (sideways loss relief) which may be a more attractive relief.
The closing date for responses to this consultation is 7 November 2016.
Please contact us using the details below if you would like any further information on this consultation or our response.
+44 20 73115709
+44 20 73114330