When landlords complete their 2017/2018 tax returns they may need to make extra calculations because of the new basis for working out profit. What sort of adjustments are required and is there a way to avoid having to make them? Read more to find out…
The new rules
In the last few years, the tax position for landlords has become more complex and tough. We suspect many will have overlooked the imposition of the cash basis for working out profits for 2017/2018 and subsequent years. This affects most landlords who are individuals but not those who are companies, limited liability partnerships or trusts. It applies to commercial and residential lets. This article we published in May, has some useful information about the taxman and property records
When does the cash basis apply
This applies to individuals who receive rents (before expenses) of £150,000 or less per year. This is the reverse of the rules which applied prior to 2017/2018. Until then, as a landlord you were required to work out your profits using normal accounting rules. The transition from one basis to the other requires special adjustments.
Cash basis v normal accounting rules
As the name suggests, the cash basis means that you can work out your profit taking account of rents etc, you’ve received and expenses you have paid. Using the normal accounting rules profit is worked out on a rent receivable by you and expenses payable. So, as a rule of thumb, if your tenants are often in arrears with rent whist you pay your bills on time, the cash basis will work well for you. But if the circumstances are reversed the normal accounting basis is probably your best option.
Note that if you elect to use the normal basis, it only applies for one year. If you want to continue on the same basis you must make an annual election.
Adjustments may be required as a result of switching to cash basis. The most significant of these are expenditure on equipment etc., which would have qualified for capital allowances under the normal rules, and interest on loans. The amount of tax relief for these can be permanently lost or gained, its not just the timing.
When completing your 2017/2018 tax return review the adjustments required and then you can decide if you would be better off electing to stick with the normal basis.
Interest relief restriction
Landlords already have the new rules restricting relief on mortgage/loan interest to contend with. These are gradually being phased in but already affect some property owners. If you haven’t already reviewed the future tax implications of letting property, now is the time to do so, before you get a nasty shock. Another article you may find useful, changes to buy to let in April 2018
Tax allowance for property and trading income
It’s not all bad news. HMRC have introduced a new allowance for property and trading income. Essentially, if you think it is more beneficial, instead of deducting actual expenses incurred from property income to arrive at a taxable figure, you can deduct a flat rate of £1,000.
This might prove beneficial to landlords with relatively low expenses, but probably not those who have mortgages or loans secured on property.
Rent a Room Scheme
It’s worth reminding everyone about this scheme where you can earn up to £7,500 per year from renting a room in your own home without paying tax.
Ideal for someone living in a relatively large house with unused rooms. The allowance isn’t restricted to home owners. You could, for example, rent a house and let one of the rooms to help cover your costs.
The rooms must be used for residential purposes (not offices) and the allowance doesn’t apply to properties which have been divided into flats.
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