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CASHING IN: HMRC changes UK landlords tax reporting

HMRC MOVE UK LANDLORDS ONTO THE CASH BASIS FOR TAX REPORTING

Effective for the 2017/18 UK tax year, UK tax-paying landlords, whose rental receipts do not exceed £150,000 per UK tax year, will move onto the cash basis for UK tax returns.

The switch is designed to make the reporting of rental income simpler and is being introduced under the umbrella of the Making Tax Digital initiative.

A need for change?
UK Rental Income Example 2018Previously, landlords were required to prepare their rental accounts, for UK tax, using the accruals basis in line with Generally Accepted Accounting Practice (GAAP). Under GAPP, rental income and expenses are only recognised once they are earned and incurred.

In addition, the landlord’s period of account was the UK tax year of 6th April to 5th April. Typically, a landlord’s income and expense timing does not match this period of account, which means that apportionments of income and expenses were commonplace.

Seeking Simplicity
UK landlords, with rental receipts not exceeding £150,000, will automatically use the cash basis, for UK tax reporting. Under the cash basis, income and expenses are recognised for tax when they are received or paid.

  • Landlords will claim capital items, introduced into the business, as an expense in that tax year; however nuances and restrictions can still apply.
    When taxpayer’s use the cash basis, outside of rental income, allowable loan interest expenses are limited to £500 per year. However, this limit does not apply to landlords. Instead, landlords are able to make deductions for their loan interest in the usual manner:
  • 2017/18 – 75% of interest is fully relievable, with the remaining 25% relievable at the basic rate of tax only.
  • 2018/19 – 50% of interest is fully relievable, with the remaining 50% relievable at the basic rate of tax only.
  • 2019/20 – 25% of interest is fully relievable, with the remaining 75% relievable at the basic rate of tax only.
  • 2020/21 and onwards – all interest relievable at the basic rate of tax only.

It should be noted that HMRC has updated their guidance to reflect a new view that a further restriction on interest should be applied. Specifically that the amount of interest, which is relevant for the above rules, is limited the proportion of the loan that is actively used in the property rental business. Previous guidance had suggested that capital could be extracted from the rental business without affecting the loan interest expense claim.

It is worth mentioning that landlords can choose to continue using GAAP instead. Also, landlords with more than one rental property are able to elect the cash basis or GAPP, on a property-by-property basis.

Transitioning
In the first year of using the cash basis, there will be an adjustment for any prepayments and accruals taken into account in the previous UK tax year. The net of all the adjustments is added to, or deducted from, the rental profits for the first year.

Benefits for US tax filers
US tax returns normally use the cash basis for reporting rental income. This has meant a mismatch in reporting techniques on US and UK tax returns. Now that landlords can use the cash basis for UK tax returns also, reporting rental income and expenses should be easier for clients filing both US and UK tax returns.

Please contact us should you have any questions.

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