The cash basis is the default basis of accounts preparation for landlords with annual rental income of £150,000 or less running unincorporated property businesses. Under the cash basis, income is only recognised when received and expenses are only recognised when paid; there is no need to account for debtors and creditors or prepayments and accruals. Simpler rules also apply to capital expenditure.
Under the accruals basis, expenses can only be deducted in calculating taxable profit if they are incurred wholly and exclusively for the purposes of the business and are revenue in nature. Relief for capital expenditure is given either through the capital allowances system or as a deduction when computing the gain or loss on the disposal of the property.
However, under the cash basis, capital expenditure can be deducted unless it falls into one of the categories listed below in respect of which a deduction is specifically prohibited.
Expenditure which is incurred on or in connection with the acquisition or disposal of a business or part of a business cannot be deducted in calculating the taxable profits of the property rental business.
Likewise, no deduction is available in respect of expenditure on an item of a capital nature which is incurred on or in connection with the provision, alteration or disposal of:
- any asset that is not a depreciating asset;
- any asset that is not acquired for use on a continuing basis in the trade;
- a car;
- land;
- a non-qualifying intangible asset, including education or training; or
- a financial asset.
A depreciating asset is one which within 20 years is either no longer of use as a business asset or has a value of 10% or less of its value at the time that the expenditure on it was originally incurred.
Where the let is a residential let (including now a holiday let), the cost of domestic items cannot be deducted. Instead, relief is given when the item is replaced in accordance with the relief for replacement domestic items.
Where the landlord uses the cash basis and incurs capital expenditure which is not deductible, relief may be available under the capital allowances system or in calculating the gain or loss on sale.
