Cash basis or accruals for a rental business: what the default does, and when to elect out
Since 2017/18 most individual landlords have prepared their rental figures on the cash basis without ever choosing it. For a simple let that is usually the right answer. For a landlord with rent paid in advance, heavy borrowing or a jointly owned portfolio it can be the wrong one, and electing out has a deadline. Here is what each basis does, the interest formula that applies only on the cash basis, and how to choose.
The default nobody chose
Section 271A of the Income Tax (Trading and Other Income) Act 2005 makes the cash basis the default for a property business carried on by an individual, or by a partnership of individuals, from the 2017/18 tax year. It does not apply to companies, limited liability partnerships or trustees, and it stops applying in any year in which the receipts brought in on the cash basis exceed GBP 150,000. Otherwise it applies unless the landlord elects to use generally accepted accounting practice, usually called the accruals basis, in which income and costs belong to the period they relate to rather than the period in which the money moves.
Why the question is being asked again
From 2024/25 the cash basis also became the default for trading businesses, with the GBP 150,000 entry limit removed and several restrictions lifted. Those changes were made for trades. The property cash basis kept its GBP 150,000 limit and its own rules, so a landlord who is also self-employed can find the two businesses on different footings. Making Tax Digital for Income Tax, which began on 6 April 2026 for those with qualifying income over GBP 50,000, does not change the basis either. The quarterly updates follow whichever basis the business uses.
What the cash basis does
Rent counts when it is received and costs count when they are paid. Rent a tenant still owes at the year end is not taxed until it arrives, and a bill paid in March is deducted in that tax year even if the work is done in April. Capital spending is treated differently too. On the accruals basis it goes through capital allowances or gets no relief at all against income. On the cash basis, section 307B allows a deduction for capital expenditure, subject to a list of exclusions. Among them are the provision or alteration of land, which includes buildings and their structure, such as walls, floors, doors and windows; assets for use in a residential property, where replacement of domestic items relief applies instead; cars; and non-depreciating assets. Capital allowances are not available on the cash basis, except on cars.
The interest formula almost nobody checks
On the cash basis, sections 307C and 307D restrict interest where the loans used in the property business exceed the value of its properties. Value here means the market value of each property when it was first brought into the business, plus capital expenditure not already deducted. Where the loans are greater, the interest is scaled down by the fraction of value over loans, and only then does the residential finance cost restriction convert what remains into a 20 per cent tax credit. The figures are illustrative, and follow the shape of HMRC's own example at PIM1094. A landlord bought a flat worth GBP 240,000 when first let, entirely on borrowed money, and borrowed a further GBP 10,000 for repairs that were deducted when they were paid. The loans total GBP 250,000 against a value of GBP 240,000. Interest of GBP 12,000 becomes GBP 11,520, and the tax credit is GBP 2,304 rather than GBP 2,400. The sum is small here. It grows where much of the borrowing has funded costs already deducted, and it is one reason a heavily borrowed landlord should look at both bases rather than assume the default is harmless.
What else the cash basis takes away
Property losses carried forward against later property profits work on either basis. The narrower relief that lets part of a property loss be set against general income turns on capital allowances, and it is not available to a landlord on the cash basis. The timing rules can also cut the wrong way. Rent received in advance is taxed when it arrives, so a landlord whose tenants pay a term or a quarter ahead across 5 April pays tax on next year's rent this year. And a large bill for work done before the year end but paid after it falls into the later year.
Joint owners cannot always choose alone
Spouses and civil partners who own property jointly and are taxed on the default equal split under section 836 of the Income Tax Act 2007 must both use the same basis, so one cannot elect out alone. Where they have made a declaration under section 837 to be taxed on unequal beneficial shares, that condition falls away and each may choose.
Electing out, and the deadline
The election is made for a tax year, normally by ticking the box on the property pages of the return, and it must be made within one year of the filing date for that year. For 2025/26, whose online return is due by 31 January 2027, that means by 31 January 2028. It is a year-by-year choice. Moving from one basis to the other produces transitional adjustments, so that no receipt or expense is taxed or deducted twice or missed altogether, and the adjustment is worth working out deliberately rather than leaving to software.
Which basis suits whom
The cash basis suits a landlord with a few residential lets, rent paid monthly and on time, ordinary borrowing and no losses: it matches the bank statement and saves work. It also helps a landlord whose tenants are in arrears, because unpaid rent is not taxed. The accruals basis is worth considering where rent is regularly paid in advance across the year end, where large bills are often outstanding at 5 April, where borrowing is close to or above the value of the properties, or where a lender already wants full accounts, so the extra work is being done anyway. Above GBP 150,000 of receipts there is no choice to make.
Questions for your accountant
Which basis have my figures actually been prepared on, and was that a decision or a default? If I own property jointly with my spouse, are we on the same basis, and have we made a declaration of unequal shares? How do my loans compare with the value of my properties when they were first let, and has any interest been restricted under section 307D? Do my tenants pay in advance across 5 April? And if I switch, what is the transitional adjustment, and in which year does it fall? A landlord who can answer those five questions has chosen a basis, rather than inherited one.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.