Landlords! When does the cash basis apply?

Written by yasiradnan94
8 July 2020

Read this blog post to find out more information on when cash basis applies.

You may have heard about the cash basis – this is a very simplified way of accounting for profit, money in and money out. There is no need to be concerned with debtors or creditors and prepayments and accruals. Income is recognised when received and expenditure is recognised when paid. Since 6 April 2017, the cash basis has been the default basis for eligible landlords. To be eligible a landlord must not meet the tests A to E below at any time in the tax year;

Test A

  • be a limited company
  • be an LLP
  • be a corporate firm
  • be a  trustee or trust
  • be the personal representatives of a person

Test B

The cash basis can’t apply if income is greater than £150,000 for the year.

Test C

Where individuals who are married or in a civil partnership and who live together own property jointly, for income tax purposes, the income is split equally between them. Where a landlord receives a share of income from a jointly owned property and that income is being treated as arising to the joint owners in equal shares (for example where the property is owned with a spouse or civil partner) and the other joint owner uses the accruals basis to calculate their profits, the landlord must also use the accruals basis to calculate his or her profits. Consequently, if one party is not eligible for the cash basis, the cash basis is not available to the other party in respect of the property business receiving a share of the joint income.

Test D

Test D is met if a Business Premises Renovation Allowance is made in calculating the profits of the business property business and a balancing event in the year would give rise to a balancing adjustment. Where this is the case, profits must be computed using the accruals basis.

Test E

This is only relevant where none of A to D are met. Test E is that the landlord has opted out of the cash basis.

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