PIM1096 - Cash basis for landlords: transitional adjustments on entering the cash basis
Source: gov.uk (2025-07-24)


Sections 329A and 330/ITTOIA05

When a person enters or leaves the cash basis, transitional rules are used to adjust for accrued income and expenses and payments in advance. This ensures that all income and expenditure is accounted for only once.

These rules do not apply if a new property business commences during the 2017-18 tax year or later. They only apply where an existing property business changes the basis it uses.

Overview

All property businesses which meet the criteria at PIM1092 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1092) will enter the cash basis in 2017-18, unless the proprietor makes an election to remain under GAAP.

Adjustments will need to be made if any of the following apply:

The business had debts owed to it by tenants at the end of the previous tax year

The business owed money to suppliers at the end of the previous tax year

Where accounting adjustments were made for accruals or prepayments to give a true and fair view of the profits of the business under GAAP

The business had unrelieved qualifying capital allowances (for example an outstanding capital allowances pool) at the end of the last period before entering the cash basis

Adjustments for money owed - receipts

When entering the cash basis, an adjustment is required where the profit figure in the previous year’s return included amounts the business had earned but not yet received.

The transitional adjustment subtracts those amounts from the profit in the tax return for the first year under the cash basis. It does not matter whether the payment is actually received in the first year under the cash basis. This prevents the income from being taxed twice.

Example 1

Mrs P is owed £500 in rent at the end of 2016-17 tax year. As this is income earned, it was brought into account in the 2016-17 tax return and charged to Income Tax.

Mrs P meets the criteria for the property business cash basis, and starts using it by default for the 2017-18 tax year. She subtracts the £500 from her profits for the 2017-18 tax year. When she receives the rent, she once again brings it into account.

Adjustments for money owed - expenses

An adjustment is also required where the profit figure in the previous year’s return included deductions for expenses the business had incurred but not yet paid. This may include where an accrual adjustment was made under GAAP, for example where the expense deduction of a 12 month bill for council tax is apportioned across two tax years.

The transitional adjustment adds the amount of the deduction to the profit in the tax return for the first year under the cash basis. It does not matter whether the payment is actually made in the first year under the cash basis. This will prevent the relief for the expenditure from being given twice.

Example 2

Dr O owes £950 to contractors at the end of 2016-17 tax year for maintenance. As this amount was expenditure incurred, it was brought into account in the 2016-17 tax return and deducted from her profits for that year.

Dr O meets the criteria for the property business cash basis, and starts using it by default for the 2017-18 tax year. She adds the £950 to her profits for the 2017-18 tax year. When she pays the contractors, she once again brings the amount into account.

Adjustments for amounts paid or received in advance

Where a property business makes or receives payments in advance, transitional adjustments will also need to be made.

If the business has made a prepayment for a service, and the period that the service covers straddles a tax year, an adjustment may have been made under GAAP to defer part of the expense deduction until subsequent tax years. When entering the cash basis, an adjustment must be made to bring the whole of the amount paid into account as a deduction in the first year under the new basis.

Example 3

Mrs G made a payment of £2,400 for a 24 month cleaning service contract. The payment was made 2 months before the end of the 2016-17 tax year, meaning that the £2,400 covered 2 months of that tax year, 12 months of the 2017-18 tax year and 10 months of the 2018-19 tax year.

Under accruals accounting for the GAAP basis, a tax deduction of £200 is made in 2016-17, with a £1,200 prepayment balance carried forward into the 2017-18 tax year and £1,000 carried forward into the 2018-19 tax year.

However, as Mrs G enters the cash basis in 2017-18, she makes a transitional adjustment by bringing the full carried forward amount of £2,200 into account in the first year under the cash basis.

Adjustments - prepayments

Property businesses may also receive prepayments for rent, for example where an advance of rent is paid by a student for a residential tenancy where they are unable to provide a guarantor. Where the period that the prepayment covers straddles two tax years, an adjustment should have been made under GAAP to defer part of the income until subsequent tax years. When entering the cash basis, an adjustment must be made to bring the whole of the amount received into account as income in the first year under the new basis.

Example 4

Mr J lets a house to a tenant. To secure the tenancy, the tenant agrees to pay a deposit of £6,000 on 1 February 2017, covering the first 6 months of rent.

As Mr J calculates the profits of his property business using the GAAP basis in the 2016-17 tax year, he defers 4 months of the income until the 2017-18 tax year.

However, he enters the cash basis for the 2017-18 tax year, and must bring £4,000 into account in that year as a transitional adjustment. This ensures that he is charged to tax on that amount – as the amount has already been paid, it would never be brought into account under the cash basis.

Capital allowances

Capital allowances are not available under the cash basis (except for on cars). Instead, capital expenditure may be deducted in arriving at the profits of the property business, subject the specific exclusions (PIM1095 (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1095)).

When a person enters the cash basis, they may have outstanding balances of unrelieved qualifying expenditure, for example the written down value of a capital allowances pool brought forward from the previous tax year. As capital allowances will no longer be available under the cash basis, the person would not receive the written down allowance they would otherwise be entitled to.

A transitional adjustment gives relief for that amount.

Where the unrelieved qualified expenditure would have been allowed as a deduction under the cash basis rules, the amount is deducted in calculating the profits of the first year under the cash basis.

Where a pool contains cars as well as other plant and machinery, the amount relieved under these rules must be apportioned on a just and reasonable basis.

Example 5

Mr B enters the cash basis in the 2017-18 tax year. At the end of the 2016-17 tax year, he has unrelieved capital expenditure in a capital allowances pool with a written down value to carry forward of £3,000. This pool relates to a car as well as some other equipment, all of which are used in his property business.

Expenditure on the other equipment would be deductible if it was incurred when using the cash basis. The unrelieved capital expenditure on the equipment can therefore be relieved in its entirety in the first year under cash basis. However, cars are excluded from the transitional adjustment rules. Capital allowances can continue to be claimed on the outstanding unrelieved expenditure.

Because the pool is mixed, a just and reasonable basis is used to apportion the unrelieved amount of £3,000. It is determined that £1,000 of this relates to the car, and the remaining £2,000 relates to the equipment.

£2,000 can be deducted in calculating the profits of the 2017-18 tax year, the first year under the cash basis.

The remaining £1,000 that relates to the car is kept in the capital allowances pool. Capital allowances can continue to be claimed on this expenditure.

Capital allowances when paying in instalments

Capital allowances may have been claimed on expenditure which hasn’t yet been paid in full, for example because the landlord has been paying in instalments. If there are still instalments to be paid when the person enters the cash basis, this will affect the transitional adjustment.

The adjustment is calculated by comparing:

The amount of capital allowances already received

The total actually paid (e.g. the total of instalments paid)

Where before entering the cash basis the amount of capital allowances received is greater than the total of the instalments paid, the difference between these two amounts is treated as a receipt in calculating the profits of the first tax year under the cash basis.

Where the amount of capital allowances received is lower than the total of the instalments paid, the difference between the two amounts is deducted when calculating the profits of the first tax year under the cash basis.

Any future instalments are brought into account as deductions when they are paid, as per cash basis rules.

Example 6

Mrs T enters the cash basis in 2017-18. She previously bought some equipment for maintaining her properties under a hire purchase agreement. So far, she has paid £500 in instalments, and 5 instalments of £100 are still outstanding.

When Mrs T first entered the hire purchase agreement, she claimed £1,000 of Annual Investment Allowance on the full amount of the expenditure. As she has therefore claimed £500 more in capital allowances than she has so far actually paid, this £500 is treated as a receipt of the property business in the first year under the cash basis.

She will then be able to claim a deduction of £100 each time she pays an outstanding instalment.

Capital allowances and successions between connected persons

Where one person succeeds to a property business, and the successor is connected to the predecessor, they may have made an election under s266 Capital Allowances Act 2001 (see CA29040 (https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca29040)). The election means that the successor is treated as having acquired any assets transferred with the business at the value of their unrelieved balance, e.g. at their written down value if there is a capital allowances pool.

If this election has been made, the successor is treated as if everything done by the predecessor had been actually been done by the successor. The amount the successor actually paid is ignored.

Example 7

Mrs F gives her property business to her daughter, Miss F. Miss F is already renting out a property, and calculates the profits under the cash basis.

Mrs F’s business includes several pieces of plant and machinery. As she has elected to use the GAAP basis, they have partly been relieved through capital allowances. There is an unrelieved balance in the pool of £4,000.

Miss F pays £3,000 for the machinery when she takes over her mother’s business. As mother and daughter, they are connected, so they make an election under s266 Capital Allowances Act 2001. Miss F is treated as having taken over the pool with an unrelieved balance, and claims a deduction of £4,000 as a transitional adjustment.