The cash basis is a simplified way of working out your taxable profit from a property rental business. Under this approach, you're taxed on rent when you actually receive it, not when it's due. You claim expenses when you pay them, not when the bill arrives. This means you don't need to track what tenants owe you or what you owe to suppliers at year-end.
The cash basis has been the default method for most individual landlords since April 2017. If you started renting out property after this date and your annual rental income is below £150,000, you're probably already using it without realising.
Do I have to Use the Cash Basis?
Most individual landlords with rental income below £150,000 per year use the cash basis automatically. However, there are situations where you either cannot use it or may choose not to.
You cannot use the cash basis if:
Your rental income exceeds £150,000 in the tax year. This threshold applies to the total receipts you actually receive, not the amount you're owed. If you only rent property for part of the year, the threshold is reduced proportionally.
Your property business is run through a limited company or limited liability partnership. The cash basis is only available to individuals and standard partnerships where all partners are individuals.
You jointly own property with your spouse or civil partner and the income is split equally under tax law, you must both use the same method. If you've declared unequal ownership shares to HMRC, this restriction doesn't apply.
You can choose not to use the cash basis if:
You prefer traditional accounting methods, perhaps because your accountant recommends it or you want to align with how you report other business income. You must elect to use the alternative method within one year of the filing deadline for your tax return.
How is Rental Income Taxed Under the Cash Basis?
The fundamental rule is straightforward: you're taxed on rent when it arrives in your bank account or in your hands, regardless of which rental period it relates to.
Timing of rental payments | If a tenant pays £4,000 rent on 1 January covering the next six months, you report the full £4,000 in the tax year when you received it, even though the rental period spans two tax years. There's no need to split it between years. This also works the other way. If rent due in March isn't paid until the following April, you report it in the later tax year when you actually received the money, not when it was due. |
Security deposits | Tenancy deposits held in protection schemes are not taxable when you receive them because they remain the tenant's money. You only pay tax on deposit money that you become entitled to keep, typically when the tenancy ends and you retain some or all of the deposit for repairs or unpaid rent. For example, if you hold a £1,100 deposit throughout a tenancy and keep £300 at the end for damage, only that £300 becomes taxable income in the year the tenancy ends. The £800 returned to the tenant is never taxed. |
Payments through letting agents | If you use a letting agent, rental income is counted when the tenant pays the agent, not when the agent passes the money to you. This means you must report income based on when your agent receives it, which matters if your agent is slow to transfer funds. If an agent fails to pass money on to you, you're still taxed on it when they received it. |
Late or missing rent | Rent received late is taxed in the year you receive it. If a tenant never pays, you simply don't report that income because you never received it. You don't need to account for bad debts or unpaid amounts. |
When your property business ends? | If you stop renting out property and receive rent afterwards that relates to the final period, it's still taxable in the year you receive it. |
How do I Claim Expenses Under the Cash Basis?
Expenses are claimed when you pay them. The date you receive an invoice or the period the expense relates to doesn't matter for tax purposes.
If you receive a £300 cleaning bill in March but pay it in April, you claim the expense in the tax year containing April, not March.
The wholly and exclusively rule
All expenses must be incurred wholly and exclusively for your property rental business. If an expense has both business and personal purposes, it can be apportioned on a just and reasonable basis, and you can claim the portion incurred wholly and exclusively for the property business.
For example, if you use part of a loan for rental property and part for personal use, you can claim the portion of interest relating to the rental business, calculated on a reasonable basis.
What you cannot claim?
You cannot claim expenses for:
Business entertainment or gifts, except for small promotional gifts under £50 per person per year that advertise your business (and aren't food, drink, tobacco or vouchers).
Tax penalties, interest on overdue tax, or VAT surcharges.
Capital items like buying property or non-depreciating assets, though there are important exceptions explained in the next sections.
How is Finance Treated under the Cash Basis?
Interest on loans used for your property business can be claimed when you pay it, provided the loan is used wholly and exclusively for the rental business. If only part of a loan relates to the business, only that proportion of interest is claimable.
Additional restriction for residential property
Loan interest on residential rental property faces an additional restriction that affects most landlords. This restriction applies whether you use the cash basis or traditional accounting.
From April 2020 onwards, you cannot deduct residential property finance costs from your rental income when calculating taxable profit. Instead, you receive a tax credit equal to 20% of the finance costs. This restriction doesn't apply to commercial property.
Restriction when borrowing exceeds property value
There's a further restriction that only applies to landlords using the cash basis. If the total borrowing used for your property business exceeds the total value of properties in the business, your interest deduction is scaled down.
The property value includes the market value when each property entered the business, plus any capital expenditure you've incurred that hasn't already been claimed as an expense.
Here's how it works in practice: You own two rental properties worth a combined £350,000 when you started renting them out. You have mortgages totalling £430,000, all used for the rental business. You pay £17,200 in mortgage interest annually. Because your borrowing (£430,000) exceeds your property value (£350,000), you can only claim interest in proportion to the property value: £17,200 × (£350,000 ÷ £430,000) = £14,000 The remaining £3,200 cannot be claimed. The £14,000 would then be further restricted by the residential finance cost rules mentioned above. |
If your borrowing doesn't exceed your property values, this particular restriction doesn't apply.
How Does Buying, Replacing or Selling items Work?
This is where the cash basis differs most significantly from traditional accounting.
Items you can claim in full when you buy them | Under the cash basis, you can claim the full cost of certain items when you pay for them, even if they're capital items that last several years. This applies to depreciating assets expected to last 20 years or less, or decline in value by at least 90% within 20 years. This might include equipment, tools, or furnishings for commercial property. However, several important items are excluded from this treatment. |
Items you cannot claim | You cannot claim the cost of buying: Cars. Instead, you continue to use capital allowances for cars, or you can use simplified mileage rates for business journeys which include an element for the car's cost. Land, buildings, or structural elements like walls, floors, ceilings, doors, windows, drainage systems or waste disposal systems. Items that last more than 20 years or won't decline significantly in value. |
Residential property furnishings
For ordinary residential lettings (not furnished holiday lets), you cannot claim the cost of buying furniture, appliances, carpets, curtains or similar domestic items, even under the cash basis.
Instead, when you replace these items, you can claim the cost of the replacement. This is called replacement of domestic items relief and works the same way under cash basis as it does under traditional accounting.
You cannot claim the cost of initial furnishings, only replacements. If you upgrade to a better quality item, you can only claim what equivalent replacement would have cost.
When you sell items you've claimed
If you claimed the cost of an item when you bought it under the cash basis rules, and you later sell it, you must treat the sale proceeds as rental income in the year you receive them.
This also applies if you claimed the item through capital allowances before entering the cash basis, or if you claimed it as a replacement domestic item.
If you stop using an item in your business or use it less for business purposes, you may need to report its market value as income, even without a sale.
What Happens When I Start Using the Cash Basis?
If you had a property business before the cash basis became the default in April 2017, or if you previously elected to use traditional accounting and now want to switch to cash basis, you need to make transitional adjustments.
Landlords who started their property business in April 2017 or later don't need these adjustments.
The purpose of transitional adjustments
These adjustments ensure you're not taxed twice on the same income or claimed the same expense twice. They're made in your first year using the cash basis.
Rent you've already been taxed on
If you were owed rent at the end of your last year under traditional accounting, you would have paid tax on it as income earned. When that rent is actually paid, you would normally include it again under cash basis rules.
To prevent double taxation, you subtract the previously taxed amount from your first year's cash basis income. When you later receive the rent, you include it, making the overall tax position neutral.
Expenses you've already claimed
If you owed money to suppliers at the year-end under traditional accounting, you would have claimed those expenses already. When you actually pay them under cash basis, you'd claim them again.
To prevent double relief, you add the previously claimed amount to your first year's cash basis income. When you pay the bill, you claim it again, making the overall position neutral.
Advance payments
If you paid for services in advance covering multiple years, traditional accounting would spread the expense across those years. When entering the cash basis, you claim the full remaining amount in the first year, since you've already paid it.
Similarly, if tenants paid rent in advance, traditional accounting would spread it over the rental periods. When entering cash basis, you include the full remaining amount as income in the first year, since you've already received it.
Capital allowances adjustments
If you had unclaimed capital allowances when entering the cash basis, you can usually claim them in full in your first cash basis year, except for cars. Car capital allowances continue as normal.
If you bought items on hire purchase or instalments, you compare what you've actually paid against the capital allowances you've received. Any difference is adjusted in the first cash basis year, and future instalments are claimed when paid.
What Happens When I leave the Cash Basis?
You might leave the cash basis because your rental income exceeds £150,000, or because you choose to switch to traditional accounting.
The transitional calculation
When leaving, you make a single calculation with three steps:
If the result is negative:
It's an adjustment expense. You claim it immediately in full in your first year back under traditional accounting.
If the result is positive:
It's adjustment income. You spread it over six years, reporting one-sixth each year starting from your first year back under traditional accounting.
Example of the calculation At the end of your last cash basis period, tenants owe you £4,500 in rent that has been earned but not paid. You owe £99 to a contractor for work completed but not yet paid for. Step 1: £4,500 Step 2: £99 Step 3: £4,500 - £99 = £4,401 This positive result of £4,401 is divided by six, giving you £733.50 to include as income in each of the next six tax years. |
Accelerating the income charge
If you have adjustment income to spread over six years, you can choose to bring more of it forward in any of those years. You don't have to accelerate the full remaining amount.
The calculation for this is somewhat complex, but the effect is to increase tax in the earlier years and reduce it in later years, while keeping the total the same.
Prepayments made under cash basis
If you paid for services in advance while using cash basis, and those services are delivered after you've switched back to traditional accounting, you don't get to claim the expense again. You've already claimed it when you paid.
Capital items and capital allowances
When leaving cash basis, you create capital allowance pools for items you claimed under cash basis rules. Usually this results in a nil balance because you've already had full relief when you paid for the items. The pool exists so that any future disposal proceeds can be brought into the capital allowances calculation.
If you bought items on instalments and haven't finished paying, the unpaid portion can qualify for capital allowances in your first year back under traditional accounting.
Should You Elect to Use Traditional Accounting Instead?
The cash basis suits most landlords because it's simpler and matches how you naturally think about rental income and expenses. You don't need to track what you're owed or what you owe.
However, traditional accounting might be preferable if:
You have significant timing differences between earning income and receiving it, such as long rent arrears or large prepayments.
You want your rental accounts to align with other businesses you run.
Your accountant recommends it because your tax position would be better managed under traditional rules.
You're approaching the £150,000 threshold and want to avoid switching methods repeatedly.
If you're unsure, discussing your specific situation with a qualified accountant will help you make the right choice for your circumstances.
