The recent government measures to provide tax reliefs and funding for those affected by Covid-19 do not include anything specifically relating to landlords. However, there are currently two tax-related points that should be considered by landlords.
Deferral of 31 July 2020 payments on account
The 31 July 2020 tax payments on account are deferred until 31 January 2021.
Provided that any deferred tax is paid by the revised due date, no interest or penalties will be charged on the amounts deferred. In effect, this means that the 2019/20 amount payable due by 31 January 2021 will be your total tax bill for 2019/20 less the first payment on account which you have already paid in January 2020.
The deferral should help to ease cash flow issues over the next few months, however, it is essential to budget for what is likely to be an unusually large tax payment in January 2021.
Cash basis of accounting
Other than limited companies/partnerships and individuals with annual rental income of more than £150,000, landlords currently have the option of being taxed on the ‘accruals basis’ or the ‘cash basis’, the latter being the default basis.
The accruals basis is an accounting mechanism which calculates profits based on income and expenditure relating to a specific tax year, even when income is not actually received or expenses are not actually paid in that year. For example, if you were due to receive rent from your tenant for March on 1 March 2020, but you didn’t receive it until 30 April 2020, under the accruals basis it would be taxed in 2019/20 as that is the tax year in which it was due.
Using the accruals basis where tenants have delayed or stopped rent payments could result in landlords being taxed on rent which has not actually been received. Bad debt claims can ultimately be used to correct the position, but landlords would suffer a cash flow disadvantage in the short term.
The cash basis, on the other hand, calculates taxable profits only on income actually received and expenses actually paid in the tax year. Using the cash basis of accounting will allow landlords with defaulting tenants to only pay tax on rents they have actually received.
Ensuring that rental profits are calculated and taxed on the cash basis, particularly for the year starting 6 April 2020 when the drop in rental payments may be most keenly felt, will ensure that landlords are only being taxed on actual rental receipts. It is simply a question of applying the correct accounting in the transitional year and making the appropriate claim on your tax return; we can advise you on how to make the change to the cash basis if it is appropriate to do so.
If future government announcements specifically address the position for landlords, we will update our website to reflect the relevant details.