MTD: government response on the simplified cash basis for unincorporated property businesses

On 31 January 2017, HMRC published the outcome of the consultation on Income tax - simplified cash basis for unincorporated property businesses. This includes a summary of the consultation responses together with the government’s comments and conclusions, and sets out next steps.

This was one of six 2016 consultations on the Making Tax Digital (MTD) project. The Tax Faculty has posted news items on each of the six consultation outcomes.

Our response to the consultation on the simplified cash basis for unincorporated property businesses was published as ICAEW Rep 173/16. HMRC has also published draft legislation to enact the proposals together with explanatory notes.

The following changes will apply from 6 April 2017, one year earlier than the other MTD changes.

  • The cash basis will be the default method for calculating rental profits and losses for individuals unless the landlord opts out, or the gross annual rents exceed £150,000, in which case the accruals basis must be used.
  • If the cash basis is going to be used, it must be used for the rental business as a whole, it is not an election on a property by property basis. If a husband and wife each have a rental business, and they own just one property jointly, then they will have to use the same basis for their entire property business as they must use the same basis for their jointly owned property.
  • Joint owners of a rental property can take an independent decision as to whether or not to use the cash basis, except where the joint owners are a married couple or civil partners when they must both use the same basis (see above).
  • Overseas and UK property businesses will be treated as separate businesses and the decision over whether or not the cash basis is used can be made separately for each business.
  • If the landlord also has a trading business, a separate decision can be taken for the trading and property business.
  • The cash basis is not available to trustees, personal representatives, companies, limited liability partnerships and corporate firms (one where one of the partners is not an individual). The exclusion of complex structures from the cash basis is understandable, but as many trusts are very simple, it is unclear why they are excluded from the cash basis.

From 6 April 2020, tax relief for interest paid will be given as a tax reducer calculated as 20% of the interest paid. The change is being phased in over four years from 6 April 2017, with 25% of the interest restricted, and additional 25% restrictions applied in subsequent years.

For the remaining few years while a proportion of the interest paid is still a rental expense, it can be calculated in the same way for the cash basis as for the accruals basis. Under the cash basis for trading businesses interest relief is restricted to £500 of interest.

Exclusions

Lease premiums, or work done by the tenant in lieu of a premium will not fall within the cash basis.

Refundable security deposits will not have to be accounted for under the cash basis until they become rightfully the landlords, at which point there should be an expense to match against it for the remedial work that the deposit was retained for.

Timing for receipts and payments

The timing for receipts and expenditure where the property is managed by an agent, will be the date the cash is received or paid by the agent and not the date that the agent accounts for it to the landlord.

Some outstanding issues remain

Problems highlighted in our response to the consultation still remain; for example, depending on whether the cash or accruals basis is used, a landlord may be taken in and out of accountability for the High Income Child Benefit Charge, may lose some or all of the personal allowance, or may find they are paying tax on rental income at 40% rather than 20%.

Fluctuations in the timings of rent receipts could also have an adverse effect on the level of the payments on account, so will make it more difficult for some landlords to predict their tax liabilities with accuracy.

This new regime will apply from 6 April 2017, a year ahead of MTD. Draft legislation has been published for inclusion in Finance Bill 2017. If you have any comments on the draft legislation please send them to sue.moore@icaew.com.

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