The accruals basis is the traditional method of accounting for property income. Unlike the cash basis where income and expenses are recorded when money changes hands, the accruals basis recognises income when it is earned and expenses when they are incurred, regardless of when payment actually happens.
This guide explains the accruals basis (also known as GAAP - Generally Accepted Accounting Practice) for UK property businesses. This is the alternative to the cash basis and applies to landlords who don't qualify for or choose not to use the simplified cash basis method.
What it is?
You report income when it's earned and expenses when they're incurred, not when money changes hands.
Cash basis: " I receive £10,000 rent in March 2025. Since it falls in the 2024-25 tax year, I report the full £10,000 in that tax year.
Accruals basis: I receive £10,000 rent in March 2025. The rent covers February to July 2025. £2,000 for February and March is reported in 2024-25 tax year. £8,000 for April to July is reported in 2025-26 tax year.
When Accruals Basis Must Be Used?
You must calculate your property business profits using the accruals basis if:
Your property business is run by a company, limited liability partnership, trustees, or a partnership with corporate members.
Your annual property receipts for the tax year exceed £150,000, which is the threshold above which the cash basis is no longer the default reporting method.
Business premises renovation allowance balancing charges arise.
An election has been made to use GAAP instead of the cash basis, and that election is in effect for the tax year.
How Income is Recognised Under Accruals?
Income is recognised in accordance with normal accounting principles. This means you include all income earned in the tax year, regardless of, when it is due to be paid, when it is actually received, whether payment has been received at all by the year-end.
The key question is: What proportion of the rent relates to the tenant's use of the property during the tax year?
Rent Paid in Advance
When a lease provides that rent is payable in advance, you must:
Include the proportion of any rent due before or during the tax year which relates to use of the property during that year
Exclude the proportion which covers use of the property in a future tax year
This requires apportioning rent payments across the tax years they relate to.
Example
A landlord charges rent yearly in advance.
•Due 1 January 2025: £120,000
•Due 1 January 2026: £180,000
We are working out the taxable rent for the 2025-26 tax year.
Rent due 1 January 2025
This covers January to December 2025 The part that falls in the 2025-26 tax year is April to December 2025 That is 9 months
£120,000 ÷ 12 × 9 = £90,000.
Rent due 1 January 2026
This covers January to December 2026 The part that falls in the 2025 -26 tax year is January to March 2026 That is 3 months
£180,000 ÷ 12 × 3 = £45,000.
Total taxable rent for 2025 to 2026: £90,000 + £45,000 = £135,000.
Key point Some of the rent due in January 2026 is taxed in 2025-26 This is because it relates to that tax year It does not matter whether the rent is received by 5 April 2026.
Rent Paid in Arrears
The same principles apply in reverse when rent is payable in arrears:
Include the proportion of any rent due during or after the tax year which is for use of the property in the current tax year
Exclude the proportion which relates to use of the property in a prior tax year
How Expenses Are Recognised Under Accruals?
Expenses are recognised using normal accounting principles, which mirror the approach for income. You deduct allowable expenses that relate to work done for the property business, or goods and services supplied to it, during the tax year.
It does not matter:
Whether the bill has been paid before or after the year-end
When the invoice was issued
Whether payment is due yet
The key question is: When was the work done or the service provided?
Special Rule for Salaries and Wages
There is one important exception to the general rule. amounts for employees salaries and wages are deductible if paid during the period of account or within 9 months of the end of that period. For this purpose, renumeration is treated as paid when it is received by the employee for income tax purposes or when PAE is operated. This prevents indefinite deferral of wage payments while still claiming the tax deduction.
Practical Examples showing when expenses are deductible
Property Maintenance
A landlord has property painted during Feb 2025. The work is finished before the end of February. It was billed on 10 April 2025 and paid on 30 April 2025.
Under the accrual’s basis, the full amount is deductible in the tax year ending 5 April 2025. This is the year when the work was done. The expense cannot be deducted again in the year ending 5 April 2026 when it is actually paid, because the expenditure is not for maintenance work in 2025-26 and the relief has already been given in 2024-25.
Insurance Premiums
A landlord pays the following insurance premiums:
£2,000 on 1 January 2025, covering the year to 31 December 2025
£2,200 on 1 January 2026, covering the year to 31 December 2026
For the tax year ending 5 April 2026:
From the 1 January 2025 premium: Coverage for 6 April 2025 to 31 December 2025 = 9 months Deductible: £2,000 × 9/12 = £1500
From the 1 January 2026 premium: Coverage for 1 January 2026 to 5 April 2026 = 3 months Deductible: £2,200 × 3/12 = £550
Total deductible for 2025-26: £2,050
Time Apportionment: Simplified vs Strict
The Simplification Approach
For small figures, you can use whole months rather than daily calculations, provided this approach is applied consistently for all items, the amounts involved are not substantial, the simplified approach does not produce a materially different result.
In the insurance example above, using whole months produces a deduction of £2,050.
The Strict Daily Approach
For substantial figures, strict daily calculations are needed. Using the same insurance example with daily apportionment:
From 1 January 2025 premium: £2,000 × 270/365 days = £1479
From 1 January 2026 premium: £2,200 × 95/365 days = £573
Total: £2,052
The difference (£2) is negligible, so the whole month approach is acceptable. However, when dealing with large rent payments or substantial expenses, daily apportionment should be used to ensure accuracy.
Dealing with Bad Debts
Under the accruals basis, you must include income when it is earned, even if payment has not been received. This means:
You cannot simply exclude receipts because they haven't been paid by year-end.
You cannot exclude receipts because the debt might be bad.
However, as a separate matter, you can deduct as an expense the amount of any receipt that:
Has been included in the profit calculation, and
Is genuinely bad or doubtful
This two-step approach ensures income is properly recognised while allowing relief for uncollectible amounts.
Rent-Free Periods and Lease Incentives
Sometimes landlords grant leases with unusual payment patterns, such as:
Initial rent-free periods
Reduced rent in early years
Step rents that increase over time
Example:
A 20-year lease with five years to the next rent review. No rent is payable in year 1, and £10,000 annually is payable in years 2-5.
Modern accounting practice requires spreading the total rent evenly over the relevant period. Under UK accounting standard UITF28, the total rent is spread over the shorter of the lease term or the period to the first rent review.
In this example:
Total rent in first five years: £40,000
Spread evenly: £8,000 per year for five years
The landlord recognises £8,000 income each year
The tenant deducts £8,000 rent each year
This reflects the economic substance. There isn't really a rent-free year; the total rent secures the property for the entire five-year period.
Alternative Accounting Standards
Different accounting frameworks treat lease incentives (like rent-free periods) differently:
Under older UK accounting rules: Lease incentives are spread over the period until the first rent review (or the full lease term if there's no review during that time).
Under international accounting standards: Lease incentives are spread over the entire lease term.
Under current UK accounting standards (which most UK businesses now use): Lease incentives are typically spread over the entire lease term, unless spreading them differently would better reflect the actual economic benefit.
How Accruals Basis Differs from Trading Income?
Similarities with Trading Rules
Property businesses using the accruals basis follow the same fundamental principles as trading businesses:
Revenue vs Capital DistinctionEveryday running costs are deductible (repairs, insurance, agent fees), while one-off asset purchases are not (buying properties, major extensions). |
Wholly and Exclusively TestExpenses must be entirely for the property business. Mixed-use expenses must be apportioned, with only the business portion deductible. |
Accruals RecognitionBoth types of business recognize income when earned and expenses when incurred, regardless of payment timing. |
Statutory Expense RulesThe same restrictions apply: no deductions for business entertainment, penalties, or capital expenditure. |
Key Differences from Trading Rules
Despite these similarities, property income is treated differently in important ways:
Tax Year AlignmentTrading businesses can choose any accounting year-end (such as 31 December) and use "basis period" rules to determine which accounting period's profits are taxable in each tax year. Property businesses must always use the tax year itself (6 April to 5 April). Your profits for 6 April 2025 to 5 April 2026 are what you report for 2025-26. Individuals must calculate property income for the tax year to 5 April. However, for a trading or professional partnership, the profits included are normally those of the partnership's accounting period ending in the tax year |
Loss Relief TreatmentTrading losses offer several relief options such as carry forward to future profits, offset against other current year income, or sometimes carry back to earlier years. Property losses can only be carried forward and offset against future property business profits. They cannot be offset against salary, pension, or other income sources. Exception: Furnished holiday lettings (until April 2025) receive more generous loss relief similar to trading losses. A property business loss does not reduce your overall tax bill immediately; it only reduces future property taxes. |
Property-Specific RulesCertain tax rules exist solely for property income with no trading business equivalent: Lease Premium Taxation: When granting a lease for a premium (lump sum payment), special calculations determine how much is taxed as income rather than capital. The portion treated as income depends on the lease length. Lease Variation Treatment: Specific rules govern the tax treatment when lease terms change, with no equivalent for standard trading contracts. Property Business Expense Rules: Some reliefs are written specifically for property businesses, such as replacement of domestic items relief for residential landlords. These reliefs are not available to trading businesses. Property income has distinct rules and calculations that don't apply to trading businesses, so assumptions based on trading income treatment may not hold. |
Interest and Finance Cost Restrictions
An important limitation affects residential property landlords using the accruals basis:
Tax years 2017-18 to 2019-20
Partial restriction on deducting interest and finance costs on residential property loans.
From 2020-21 onwards
For individuals and trusts subject to income tax, no deduction is allowed in calculating profits for interest and finance costs on residential property loans from 2021 onwards. Instead, a basic rate tax reduction is given. This restriction does not apply to companies subject to corporation tax.
This restriction applies equally whether you use accruals basis or cash basis.
Comparing Accruals Basis with Cash Basis
When Results are Similar
Property business profits under the accruals basis and cash basis may not differ materially when:
Rental income is received at frequent intervals (weekly or monthly).
Business expenses are paid at similarly short intervals.
There are no significant timing differences between earning and receiving income.
There are no major prepayments or accruals.
When Results Differ Significantly
The two methods produce different results when:
Large rent payments are made annually or quarterly.
Significant expenses are paid in advance or in arrears.
The business has substantial debtors or creditors at year-end.
Major one-off receipts or payments occur near year-end.
Who Should Use Accruals Basis?
Mandatory Users
You have no choice but to use accruals basis if your property business is run by a company, limited liability partnership, or trustees. Partnerships with at least one non-individual member must also use this method. Additionally, the accruals basis becomes mandatory if your annual property receipts exceed £150,000, or if you're claiming or affected by business premises renovation allowance balancing charges.
Optional Users
Even if you're eligible for the cash basis, the accruals basis might be the better choice in certain situations. You may prefer it if you already maintain accruals-based accounts for other business purposes, ensuring consistency across your financial reporting. Businesses with complex transactions often find the accruals basis provides a more accurate picture of their financial position. Some landlords simply prefer the more established accounting treatment that accruals basis offers.
The election to use GAAP must be made within one year of the filing date for the tax year.
What Does GAAP Accounting Mean for Your Property Business?
If you're using accruals basis accounting, here's what changes in terms of your record-keeping and the adjustments you'll need to make throughout the year.
Record-Keeping Requirements
The accruals basis demands more detailed record-keeping than the cash basis. You'll need to track when income is earned rather than just when money arrives in your bank account and similarly record when expenses are incurred rather than when you pay them. This means maintaining comprehensive records of debtors (amounts owed to you) and creditors (amounts you owe), calculating and tracking accruals and prepayments, and preparing balance sheets that show your financial position at year-end.
Year-End Adjustments
At each year-end, you'll need to make several adjustments to ensure income and expenses are recognised in the correct accounting period. This includes accounting for rent you've earned but not yet received (accrued income), as well as rent you've received that relates to future periods (deferred income). On the expenses side, you'll need to adjust for costs you've incurred but not yet paid (accrued expenses) and expenses you've paid in advance (prepaid expenses). Don't forget to account for any bad and doubtful debts as well.
These adjustments ensure income and expenses are recognised in the correct accounting period.
Things to Remember
Earning vs Payment: Income is recognised when earned, not when received. Expenses are recognised when incurred, not when paid.
Apportionment: When rent or expenses cover more than one tax year, apportion them across the periods they relate to.
Daily Basis: Use daily apportionment for substantial amounts; simplified monthly calculations may be acceptable for small amounts.
Bad Debts: Include all earned income first, then separately claim relief for genuinely bad debts.
Lease Incentives: Rent-free periods and similar incentives must be spread over the relevant lease period.
Consistency: Once you've chosen a method, apply it consistently to all aspects of your property business.
Documentation: Maintain thorough records showing when income was earned and expenses incurred, not just payment dates.
Summary
The accruals basis provides a comprehensive and economically accurate picture of a property business's performance by matching income with the period it relates to and recognising expenses when obligations arise. While more complex than the cash basis, it is mandatory for certain landlords and may be preferred by those seeking a sophisticated accounting approach.
Understanding these rules is essential whether you must use the accruals basis or are choosing between it and the cash basis, as the method you select significantly affects when you pay tax on your property income.
