Capital Expenditure And The Cash Basis For Landlords

The cash basis can make life simpler for many landlords.

Instead of dealing with debtors, creditors, prepayments and accruals, income is normally taxed when received and expenses are normally claimed when paid.

For unincorporated landlords with annual rental income of £150,000 or less, the cash basis is generally the default method of preparing property accounts.

But there is one area where landlords still need to take care: capital expenditure.

What is capital expenditure?

Capital expenditure is money spent on buying, improving or adding to an asset, rather than the day-to-day running costs of the property business.

For example, there is a difference between repairing something that already exists and improving or replacing it with something substantially better.

That distinction matters because the tax treatment may be different.

Why the cash basis can help

Under the traditional accruals basis, revenue expenses are usually deducted when calculating taxable profit, while capital expenditure may instead be dealt with through capital allowances or when calculating a future capital gain.

Under the cash basis, the rules can be more generous in some cases. Certain capital expenditure may be deductible unless it falls into one of the excluded categories.

That can be helpful for landlords, but it does not mean every capital cost is automatically allowable.

What costs are excluded?

Some expenditure is specifically blocked from being deducted under the cash basis.

This can include costs connected with buying or selling the business, land, cars, financial assets, certain intangible assets and assets that are not acquired for continuing use in the business.

Residential landlords also need to watch the rules for domestic items.

For residential lets, including holiday lets, the cost of domestic items is not usually deducted when the item is first bought. Instead, relief may be available when the item is replaced, under the replacement domestic items rules.

Why records still matter

The cash basis may be simpler, but it does not remove the need for good records.

Landlords should still keep invoices, receipts and notes explaining what the expenditure was for. This is especially important where the cost could be seen as either a repair or an improvement.

The better the records, the easier it is to support the treatment if HMRC ever asks questions.

The key point

The cash basis can simplify property accounts, but landlords should not assume that every cost can be claimed straight away.

Some capital expenditure may be deductible. Some may be blocked. Some may only give relief later.

At williams lester accountants, we help landlords understand what they can claim, what they cannot, and how to avoid messy surprises when the tax return is prepared.