Category: Income Tax

The cash basis scheme helps landlords, sole traders and other unincorporated businesses to benefit from a simpler way of managing their financial affairs for their property business. The scheme is not open to limited companies and limited liability partnerships. The entry threshold for the cash basis scheme is £150,000 and qualifying businesses can stay in the scheme until their business turnover reaches £300,000. 

Since the 2017-18 tax year, it has been the default basis for most property businesses that are run by individuals or partnerships with income for the tax year of £150,000 or less. A landlord can elect to opt out of the scheme in which case they can continue to use generally accepted accounting practice (GAAP) to calculate their taxable profits. 

HMRC’s property income manual lists the following list of circumstances when the cash basis is not available to a property business. 

• A: The property business is run by a company, limited liability partnership (LLP), trustees or a corporate firm (a partnership with at least one non-individual member).
• B: Receipts that would be brought into account under the cash basis for the tax year exceed £150,000. This amount must be proportionally reduced if the property business is only carried out for part of the tax year.
• C: If the property business is being carried on jointly with a spouse or civil partner, the same basis must be used by both individuals, unless they make a declaration under S837/ITA 2007 that they are beneficially entitled to the income in unequal shares.
• D: Business premises renovation allowance has been claimed, and a balancing event in the tax year gives rise to a balancing adjustment.
• E: An election is made to use GAAP because the person believes that traditional accounting is more appropriate. The election must be made within one year of the filing date for that tax year.

https://www.gov.uk/government/publications/calculation-of-profits-of-property-businesses/income-tax-simplified-cash-basis-for-unincorporated-property-businesses

As a general rule, the fall-back position for couples who live together with their spouse or civil partners is that property income – where the property is owned in joint the names – is divided 50:50. This is the regardless of the actual ownership structure. However, where there is unequal ownership and the couple wants the income taxed on that basis a notification must be sent to HMRC together with proof that the beneficial interests in the property are unequal. This is done using Form 17 published by HMRC.

A Form 17 declaration can only be made by spouses or civil partners that are living together and own property in unequal shares with the income being allocated in proportion to those shares. Couples that are separated or in some other type of union cannot make a Form 17 declaration. The declaration is only valid if both partners agree. If one spouse/partner does not agree then the income will continue to be treated on a 50:50 basis even if the ownership structure is different.

A Form 17 declaration stays in place until there is either a change in the status of the couple i.e. separation or divorce or a change in the ownership structure. If either of these occurs the 50:50 income split will reapply.

There are a number of scenarios where a form 17 cannot be used, such as where a husband and wife or civil partners own property as the beneficial joint tenants, for commercial letting of furnished holiday accommodation, and for partnership income.

Where property is held in an unequal split, making a form 17 declaration can have a tax advantage where, for example, the majority owner of the property pays tax at a lower marginal rate than their partner.

The settlement legislation rules are intended to prevent an individual from gaining a tax advantage by entering into arrangements which divert his or her income to another person who is liable at a lower rate of tax or is not liable to Income Tax.

Where a settlor has retained an interest in a property, the income arising is treated as the settlor’s income for all tax purposes. A settlor can be said to have retained an interest if the property or income may be applied for the benefit of the settlor, a spouse or civil partner.

In general, the anti-avoidance settlement legislation can apply where an individual enters into an arrangement to divert income to someone else and in the process, tax is saved.

These arrangements must be:

• bounteous, or
• not commercial, or
• not at arm’s length, or
• in the case of a gift between spouses or civil partners, wholly or substantially a right to income.

However, there are a number of everyday scenarios where the settlements legislation does not apply. In fact, after much case law in this area, HMRC has confirmed that if there is no ‘bounty‘ or if the gift to a spouse or civil partner is an outright gift which is not wholly, or substantially, a right to income, then the legislation will not apply.

The settlements legislation is tax law that aims to prevent high earning taxpayers from making use of the tax allowance of a lower earning spouse, partner, family member or friend. … HMRC lost the case, which provided contractors with certainty about the settlements legislation’s exemption for spouses and civil partners.