As announced in August 2016 and confirmed at Spring Budget 2017, the government will legislate in Finance Bill 2017 to allow most unincorporated property businesses (other than Limited Liability partnerships, trusts, partnerships with corporate partners or those with receipts of more than £150,000) to calculate their taxable profits using a cash basis of accounting. Landlords will continue to be able to opt to use Generally Accepted Accounting Principles (GAAP) to prepare their profits for tax purposes.
Note the wording carefully, Landlords will be automatically in Cash Accounting and have to Opt Out, normally, its the opposite way round you have to Opt into Cash Accounting if you are a Trading Business.
Under the cash basis, capital allowances, except on the provision of cars, are not available. Instead, landlords will be able to claim the upfront cost of capital items used in the business.
As for those who do opt to use GAAP, the initial cost of items used in a dwelling house is not an allowable expense under the cash basis. The existing ‘replacement of domestic items relief’ will continue to be available for the replacement of these items when the expenditure is paid.
Interest expense will be treated consistently between those using the cash basis and those using GAAP.
In theory it is simpler just reporting Cash In and Cash Out, but it doesn’t always work in your favour, for example:
- Finance – if you buy equipment or furnishings on finance cash accounting restricts you the repayments rather than the full value under UK GAAP
- Profits can be higher as there are no accruals or provisions
Will Cash Accounting work for your property business?