I have a buy-to-let property: how can I reduce the tax I pay?
“I am a landlord. Due to COVID-19, I have agreed to defer my tenant’s rent until things improve and the tenant can work again. Can I declare the reduced rental profit I declare on my next tax return, so I only pay tax on the rental income I have received?'“
The key here is that as a landlord and a sole trader who declares income via a self assessment tax return, you account for your rental income on a ‘cash basis’ method versus an accrual basis. Cash basis is pretty straightforward and means you account or declare expenses and income as you receive it. To be eligible to account your income via the cash basis you must unincorporated or a sole trader and have less than £150,000 income in a given tax year.
So to be clear, cash basis means during these difficult times that you only pay income tax and national insurance contributions as a sole trader on the income you receive from your tenant, not income that is due you but not yet received. The deferred income should be declared at the time of receipt.
HMRC have clear eligibility criteria to check if you are eligible for cash basis accounting, found here.
What happens if you do not qualify for cash basis accounting?
Most landlords complete sole trader accounts, detailing income in via rent less allowable expenses, to arrive at a profit before tax figure to declare on the tax return.
If you as a landlord do not qualify for cash basis accounting, the rental income figure you would use to calculate your profit before tax would be as per the tenancy agreement put in place, and this in the figure you would use regardless whether you received the rental income or not.
When is the tax due?
An important, practical point here is that we are only a month in to the new tax year, and indeed most businesses and landlords were directly affected by COVID-19 at the start of the new tax year. Therefore, it is very likely that even if you as a landlord have deferred payment of rent to help your tenant, you will receive the deferred income in the current tax year or over the next 12 months, and therefore would not be liable for tax on rental income not received.
If, however, you are in this position by the end of the tax year in March 2021, and are still waiting for deferred rental payments for this tax year 2020/2021, remember the tax due will not need to be paid until January 2022 and July 2022, so plenty of time to plan.
