The changes affect how profits are calculated and introduce a new property allowance of £1,000 below which profits are not taxed. Whilst the policy objective of these changes is to provide simplification the position for a typical landlord is now best summarised by the table below.
| TOTAL RECEIPTS | DEFAULT BASIS OF TAXATION | ALTERNATIVE TREATMENT |
| Up to £1,000 | Covered by property allowance so no charge to tax | Elect for allowance not to be given (for example, if wish to claim losses) |
| Up to £150,000 | Profits calculated on cash basis |
May elect to deduct property allowance instead of actual expenses. May elect to calculate profits on accruals basis |
| Above £150,000 | Profits calculated on accruals basis in accordance with GAAP | May elect to deduct property allowance instead of actual expenses (but unlikely to be of benefit) |
The cash basis applies by default for most property owned by individuals unless receipts exceed £150,000. It is possible to elect each year to use an accruals basis to calculate the profits instead.
Where a property business is carried on by spouses and the profits are shared equally, you must use the same basis to calculate profits.
Individuals will be entitled to an annual allowance of £1,000 against property income and if receipts are below £1,000 the allowance automatically applies. If receipts exceed £1,000 you can elect to deduct the annual allowance instead of actual expenses.
Whilst the new allowance can result in a tax saving of £200 a year for a basic rate taxpayer, a lack of guidance and publicity from HMRC may result in an exceptionally low take-up.
Landlords should be no worse off following the introduction of the cash basis and property allowance but there is the potential to make tax savings by opting for the appropriate basis of taxation.
With these changes and the restriction of tax relief on finance costs for higher rate taxpayers, which also start to have an effect from 6 April 2017, it is important to review your current portfolio to ensure that it is structured as tax efficiently as possible.
Finally, it will still be necessary to keep detailed records for your property business regardless of the basis of taxation.
For more information or to arrange a meeting with one of our experienced property specialists please email tax@streetsweb.co.uk
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