The property income or rental profits are calculated in the UK on a cash basis unless the gross property income exceeds £150,000 for the tax year. If the gross property income exceeds £150,000, the rental profits must be calculated on accrual basis. If the property business has been carried on for part of the tax year, the limit of £150,000 will be reduced proportionally.
The ‘cash basis’ is a default method for calculating the rental profits where the gross income hasn’t exceeded the threshold of £150,000. However, an election can be made to use accrual basis for calculating property income.
Property Income calculation under the Cash basis
Cash basis calculations mean income will be recorded as income when it is received, and the expenses will be recorded as expenses when paid. In simple words, from the point of view of calculating rental income, rental income will be recorded as rental income when received in the bank account or as cash receipt, and the expenses have been paid from the bank account or as cash payment. Rental income received minus expenses will give the rental profit figure.
Rents received
Less: expenses paid
Property income profits/(loss)
£
XXX
(XXX)
XXX
Example: Calculation of Rental profits – Cash Basis
Mr A landlord lets out his house for a monthly rent of £1,000 per month to Mr X, tenant for the tax year 2023/24. As per the tenancy agreement, Mr X must pay his monthly rent on the 1st day of every month.
The tenant had financial difficulties and couldn’t pay his February and March rent on time. He paid the rent for February 2024 and March 2024 on 30/04/2024.
In the above scenario, Mr was supposed to receive a rental income of £12,000 in the tax year 2023/24, but in reality, he received £10,000 rental income during this tax year. The remaining £2,000 was received in the tax year 2024/25.
Under cash basis calculation of rental profits, Mr A landlord has a rental income of £10,000 (rent received) for the tax year 2023/24. The remaining £2,000 received in 2024/25 will be taxable in 2024/25.
Property Income calculation under the accrual basis
If the cash basis doesn’t apply or the landlord has elected to use an accrual basis, the landlord’s rental income will be calculated using the accrual basis method.
Under the accrual basis, the rent will become the income of the landlord when it is due, not when it is paid. The date of payment is irrelevant. From rent receivable, we deduct any allowable expenses payable to calculate rental profits. Rent receivables minus rent payable will give profit income profit/(loss) for the tax year:
Rents Receivables
Less: expenses payables
Property income profits/(loss)
£
XXX
(XXX)
XXX
In the above example, Mr X landlord was entitled to receive £12,000 for the tax year 2023/24, but he actually received only £10,000 due to tenant’s financial difficulty. Under the accrual basis, Mr X’s rental income is £12,000, which is receivable for the tax year. It is irrelevant when the rent is paid for the last two months.
Allowable expenses against rental income
The most common question landlords usually have is what expense can be claimed against rental income. In simple words, the answer is that ‘any expense incurred wholly and exclusively for the purpose of rental property business’ is an allowable expense.
Under both cash basis and accrual basis, the allowable expenses are deducted when calculating rental profits.
I have listed below the most commonly incurred expenses claimed by landlords:
- Estate agent’s fees and commission
- Repairs and maintenance to the property
- Insurance premiums
- Mortgage interest
- Accountancy fees
- Rent, rates and council tax
- Gardening, cleaning etc
- Replacement of domestic items
