Reform of landlords' taxation?

Newsletter issue - June 2017.

The government's plans to allow landlords to use the cash basis for tax purposes were confirmed in the 2017 Spring Budget, but although the proposed legislation was included in Finance Bill 2017, it did not appear in the much reduced Finance Act 2017, which received Royal Assent on 27 April 2017. It is likely that the proposals have been temporarily shelved, pending the outcome of the General Election, and are expected to reappear in a second Finance Bill later this year. If the provisions are subsequently enacted, they are expected to apply retrospectively from 6 April 2017, i.e. for the current tax year.

Up to and including 2016-17, profits of a property business must be calculated in accordance with generally accepted accounting practice (GAAP), commonly referred to as the accruals basis. Although this remains the case for certain landlords (including companies, LLPs, corporate firms, and trustees of trusts), if the Finance Bill 2017 provisions are enacted, the position for 2017-18 onwards will be more complicated. The general rule is that the cash basis must be used. However, this is subject to some exceptions and there will be scope for the individual to elect to continue using the accruals basis if they so wish. The new property allowance will remove some landlords from income tax, whilst for others, it will provide a deduction from profits of £1,000.

Property allowance

The property allowance works as follows:

A number of restrictions apply. The property allowance will not apply:

Cash basis

The cash basis operates by reference to the tax year. This means that profits are calculated for the tax year by adding or subtracting:

Reform of capital expenditure rules

To date, the cash basis rules have prohibited a deduction for expenditure of a capital nature unless such expenditure would qualify for plant and machinery capital allowances under the ordinary tax rules. However, if the Finance Bill 2017 proposals are enacted this general disallowance of capital expenditure rule will be replaced from 2017/18 onwards with a more limited disallowance of capital expenditure incurred in relation to assets which are not used up in the business over a limited period.

So, if enacted, from 2017/18 onwards, relief will be prohibited only in relation to costs incurred in relation to the provision, alteration or disposal of:

Costs in relation to the acquisition or disposal of a business, or part of a business, will also be excluded.

On entering the cash basis, which many taxpayers will do for 2017-18, it will be necessary to adjust for:

These adjustments are designed to ensure that no amounts are either left out of account or double counted. The adjustment income/expense is brought into account on the last day of the first period of account under the cash basis.

Similar rules apply where a taxpayer leaves the cash basis with the exception that adjustment income is automatically spread over six years unless an election is made to accelerate the charge.

Given the uncertainty of the current situation, clients are encouraged to ensure that all income and expenditure is recorded, particularly where clients are intending to make use of the property allowance. If the proposals are not enacted, or are delayed to a future tax year, the client will need to report their actual income and expenditure and so it is important that adequate records are kept.

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