The Cash Basis for Landlords Explained

It's understandable if you missed an accounting change that took effect on April 6, 2017, considering all the tax reforms that have been enacted in recent years that have an impact on landlords. However, you can be excused for this oversight.

For those who aren't aware, the cash basis is the kind of accounting that is most commonly used by landlords nowadays.

The cash basis is a more straightforward approach to bookkeeping that, depending on the circumstances of your business and personal finances, could help you save time and effort.

WHAT COUNTS AS CASH IN THIS TRANSACTION?

When calculating taxable profits, the cash basis takes into account all of the cash that flows into and out of your company. When you get income, it is then subject to taxation, but expenses can be deducted as they are incurred.

This implies that you are only responsible for paying income tax on the money that you received during the accounting period in question.

It is geared toward individuals who have reasonably straightforward tax situations, such as sole proprietors, partners, and certain proprietors of small firms.

RESIDENTIAL REAL ESTATE ENTITIES AND THE CASH BASIS

Since the regulations were expanded to include property businesses as of April 6, 2017, landlords are now subject to the cash basis if any of the following conditions are met:

They are not a limited liability company or partnership with limited liability.

Their income from rent comes to less than 150,000 pounds.

If you meet these qualifications but would still like to organise your financial records in a different manner, you must indicate your preference on your tax return.

Because the opt out is only valid for one year, you will need to go through the process again every year in order to prevent being included in the scheme by default.

You will need to prepare your tax return for the 2017–2018 tax year for the first time using the cash basis. Here are some things that you should keep an eye out for:

ENTERING AND LEAVING THE CASH BASIS

When you switch to the cash basis or exit the scheme, there could be some accounting changes that need to be made. This is something that we are able to take care of while compiling your accounts, and it should not have an effect on your tax status.

THE £150,000 THRESHOLD

HMRC is aware that enterprises operating on a cash basis have the potential to expand during the tax year. In order to address this issue, it permits the majority of enterprises to continue participating in the plan until their annual revenue surpasses 300,000 pounds.

Nevertheless, landlords are now exempt from compliance with this requirement. Instead, when their annual revenue reaches £150,000, landlords are required to withdraw from the programme.

It may be difficult to ascertain whether or not you are qualified for this benefit if you have an annual income that is near to the threshold of £150,000.

JOINTLY-HELD PROPERTY

The nature of your business partnership with the other owner will determine the accounting choices available to you if you co-own a piece of property.

Couples who have tied the knot or who are civil partners

Both parties are required to account for property revenue using either the cash basis or traditional accounting methods.

Neither married nor registered as a civil partner

It is not necessary for individuals who jointly hold property to keep their books in accordance with one another.

On the other hand, if one owner decides to use traditional accounting while the other opts to use the cash basis for landlords, then the same accounts will need to be prepared using two different approaches.