I am a landlord. I have agreed to defer my tenant’s rent during Covid-19. Will I be able to reduce the rental profit for the deferred rent — if received in a later tax year — when I complete my next tax return?
Andrew Timms, a partner at UHY Hacker Young, says the short answer is yes, you will be able to if you qualify to use the “cash basis” method of calculating your income and expenses for your self-assessment tax return. This is pretty straightforward and “does what it says on the tin” — you pay the tax when you collect the cash. It is very well explained on HMRC’s website, as is the eligibility criteria. Generally, your business must have annual income of less than £150,000 and be unincorporated.
It is understandable for landlords to be worried about whether they will receive rent from their tenants at this time. While it is perhaps obvious, it is probably worth saying that landlords will not pay tax on rent they do not receive, for example, in the case of agreeing to a rent reduction.
What happens if you don’t qualify for the cash basis? Most landlords will draw up accounts, taking the rent, less deductible expenses, to arrive at a profit figure to put on their self-assessment tax return. If you do not qualify for the cash basis, the figure included as rent would be as per the tenancy agreement — regardless of whether or not the cash was received considerably later.
This brings me to a key practical point. The current tax year started just a month ago on April 6, so at this point the rent would have to be deferred for a very generous 11 months for it to have any effect on the timing of the tax payment. This is not so unlikely if a repayment plan is agreed, allowing the tenant to pay off a specified amount each month.
The timing of tax payments is complicated anyway; most private landlords, who are unincorporated, will be taxed under the self-assessment system, drawing up basic accounts showing the rent, less deductible expenses of the property and calculating a profit to put on their self-assessment tax return.
This tax is collected by a payment in advance on January 31 and a second payment in advance collected on July 31. These two payments are in effect estimates and any difference to the actual amount due is collected the following January 31. In normal circumstances, any deferrals now (that fall into the next tax year which is 11 months away) will affect tax payable a long way down the track — maybe even January 2022 with a potentially lower tax bill and then January 2023 with a higher tax bill — by which stage all the reasons behind and benefits of the lower 2022 tax bill will be long forgotten.
Just to complicate matters further, HMRC has (helpfully) said it does not intend to chase “second payments on account” in July and that the taxpayer can defer until January 2021, but these payments pertain to rental income already received in the past year, so it is not directly relevant to this question asked. It only goes to show the complexity of the timing of tax payments for private landlords, who in recent years have had many other taxes heaped on them, including through selective licensing.
Overall, to summarise, the short answer is “yes” but as always you would do well to consult your adviser about your specific circumstances.
Richard Jameson, partner in the private wealth team at Saffery Champness, says that in the past rental profits were taxed on the traditional accounting basis. This meant the rental income and the expenses relating to an accounting period are taken into account for tax purposes even if the landlord actually receives rent or pays expenses outside the accounting period.
Since the 2017-18 tax year, property income has been taxed on the “cash basis” for the majority of landlords. Exceptions to this rule include corporate landlords (companies and limited liability partnerships), individual landlords whose rental receipts are greater than £150,000, and where an election has been made to follow normal accounting rules. Spouses or civil partners running a property rental business together are obliged to adopt the same accounting approach unless the rental profits are not shared equally and a declaration has been made to this effect.
Assuming that you own the property personally and you use the cash basis, you will be not be taxed on any deferred rents. If the deferred rent is received in a subsequent year, it will be taxable on receipt but if it transpires that the rent is never paid, again, this does not present a tax problem.
If you expect your rental profits will be lower in the current tax year (from April 6 2020 to April 5 2021) than they were last tax year, you may wish to estimate the tax due on the current year’s rental profits and reduce your income tax payments on account when you file your tax return for the year to April 5 2020.
Finally, should you incur a rental loss in a year, the loss is carried forward to be set against future property income profits.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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