Following consultation last year, the government have published revised proposals for taxing unincorporated property businesses on a cash basis. From 6 April 2017, profits will be taxed on a cash in, cash out basis rather than the current accruals basis.
The cash basis will operate for property businesses with receipts of up to £150,000 per year. The government expects the cash basis to apply to 99.5 per cent of all property businesses representing over 2.3 million such investors.
The new revision will become the default, although businesses can choose to continue to operate the accruals basis if they prefer. Where properties are located abroad, then an accruals election can be made separately in respect of properties in each jurisdiction.
Joint owners (but not partners), will generally be able to separately decide whether they use the cash or accruals basis.
Lease premiums received by a landlord however will continue to be subject to existing rules which apportion the premium between income and capital.
In line with existing practice, HMRC have confirmed that refundable deposits will only be taxable when it becomes the property of the landlord and not when received.
A landlord who uses a letting agent is treated as receiving income and paying expenses when the agent has received that income or made those payments on his behalf.
Currently we still await details on transitionary measures.
What does this mean?
A simpler system as fewer taxable adjustments are required and more straight forward. This should reduce compliance costs for some property businesses. Although the tax regime is complex and the phased restriction of interest deductions to the basic rate of tax will no doubt mean that many property businesses will still require professional help in preparing their tax filings.
The impact on timing of tax payments will depend on the receipts and spending pattern of each business.