Election to opt out of rental cash basis

For tax purposes accounts for income derived from property must be prepared on the cash basis unless the total income you receive from property exceeds £150,000 in a tax year. However, it can be advantageous not to use the cash basis but instead prepare your property income accounts using the accruals basis. To do this you must submit an election to HMRC.

Cash basis v accruals

Business accounts are usually prepared on an accruals basis, meaning that they reflect income and expenses relating to the accounts period. The cash basis of accounting only reflects income received and expenses paid.

Individuals and partnerships, but not companies, whose property income (residential and commercial) received for a tax year is £150,000 or less must use the cash basis for their accounts.

Why make an election?

While over the life of a property business the profits and losses will be the same whichever accounting basis is used, there can be differences, possibly significant, from year to year, e.g. where a tenant is in arrears.

The election applies to the property business as a whole. However, if you have properties abroad as well as in the UK you can use a different basis for each group.

Where you make an election to not use the cash basis it applies only for one tax year before reverting. You can make an election every year to prevent this.

Where there is a change of basis from one year to the next, you must take care to ensure that neither income nor expenditure is doubly accounted for or overlooked. HMRC provides detailed guidance on this at https://tinyurl.com/yy84wpuy.

Making the election

There is no set format for an election but it must be made on or before the first anniversary of the normal self-assessment filing date for the tax year for which the election is made. For example, for 2022/23 the time limit is 31 January 2025.

An election can be made by ticking box 20.2 of “Property income” pages SA105, or the equivalent in the software you use to complete your tax return. Where you don’t complete a self-assessment return or are electing after submitting your return use our draft election.

An election relating to a jointly owned property only affects accounts prepared by the person who made it. Therefore, if every joint owner wants to adopt the accruals basis of accounting each of them must make an election.