Most individual landlords whose property receipts for the tax year are £150,000 or less are on the cash basis automatically, unless they elect for the accruals basis (generally accepted accounting practice, or GAAP). Rent counts when it is received and costs count when they are paid. The cash basis does not switch off the residential finance cost restriction, and it adds a separate cap on interest where borrowings exceed the value of the let properties.

Who has to use the cash basis for property income?

Since 2017 to 2018 the cash basis has been the default way of working out property business profits for individuals and partnerships (HMRC Property Income Manual, PIM1092). Section 271A of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) turns the default off, and requires GAAP, in any tax year where one of five conditions is met:

  • Condition A: the business is carried on by a company, a limited liability partnership, a corporate firm (a partnership with a partner who is not an individual) or the trustees of a trust.
  • Condition B: the cash basis receipts for the year exceed £150,000. The limit is reduced proportionately if the business runs for only part of the year.
  • Condition C: a married couple or civil partners are taxed on joint property income in equal shares under section 836 of the Income Tax Act 2007, and the other spouse uses GAAP. Both must use the same basis. This does not apply where a section 837 declaration has been made to be taxed on unequal shares.
  • Condition D: business premises renovation allowance has been claimed and a balancing event could arise. PIM1092 explains this is now largely historical because the allowance ended on 6 April 2017.
  • Condition E: the landlord elects to use GAAP.

The £150,000 test is applied to receipts, not profit, and to the whole property business. All of an individual’s UK lettings form one business, while overseas lettings are kept separate. Companies always use GAAP; see buy to let through a limited company for that route.

How does the cash basis work day to day?

PIM1094 sets out the mechanics. Receipts are brought in when the money is received and expenses when they are paid, so there are no debtors, creditors, accruals or bad debt adjustments. Rent paid six months in advance on 1 January is taxed in full in the year it arrives, with no apportionment. Rent paid late falls into the year it is actually paid. Rent collected by a letting agent counts on the date the agent receives it, not the date the agent passes it on, so agent statements need to show the collection dates.

Tenancy deposits are not income when taken because the money still belongs to the tenant. Only the part you become legally entitled to keep at the end of the tenancy is brought in; see tenancy deposits: when they are taxable.

Capital expenditure is treated differently too. Section 307B ITTOIA 2005 allows a deduction for some capital spending under the cash basis, but not for assets used in an ordinary residential property, cars, or the building structure itself (walls, floors, windows and similar items). Residential landlords instead claim replacement of domestic items relief, as under GAAP (PIM1095). Capital allowances are not available on the cash basis except for cars.

How do you opt out, and by when?

The opt out is the Condition E election in section 271A(10). Section 271A(11) requires it to be made on or before the first anniversary of the normal Self Assessment filing date for the tax year concerned. In practice HMRC’s guidance on working out rental income says a landlord who prefers standard accounting must tick the box on the tax return to opt out of the cash basis. The election applies year by year, so the box needs ticking for each year GAAP is wanted.

How does the cash basis interact with the interest restriction?

There are two separate layers, and on the cash basis both can apply.

Layer one: the cash basis loan to value cap

Sections 307C and 307D ITTOIA 2005 apply only on the cash basis. If the total of the loans used for the property business exceeds the total value of the properties, the cost of the loans is scaled down. Value here means each property’s market value when it was first brought into the business, plus capital expenditure not already deducted. The allowed cost is the cost of the loans multiplied by the value of the properties divided by the loans (PIM1094). The cap covers interest and incidental costs of finance such as fees and commissions.

Layer two: the residential finance cost restriction

For residential lettings, sections 272A and 274A ITTOIA 2005 remove finance costs from the profit calculation altogether. Instead, the individual receives a tax reduction at the basic rate (20% for 2026 to 2027) on the lower of the finance costs, the property profits and adjusted total income, with any excess carried forward (PIM2058). Loans wholly for commercial property are not caught by this layer (PIM2054). The government has announced that, from April 2027, finance cost relief will be given at a separate property basic rate of 22%. The detail is on our page on landlord mortgage interest relief.

Timing also differs. Under GAAP, interest is relieved as it accrues; under the cash basis, it counts when it is paid (PIM2052).

How does that work in practice?

Illustration only. A landlord borrowed £250,000 on a flat. When it was first let it was worth £220,000, and £10,000 of capital spending has not been deducted, so its value for the cap is £230,000. Interest paid in the year is £10,000.

Step Cash basis GAAP
Interest paid or accrued £10,000 £10,000
Loan to value cap (£230,000 ÷ £250,000) £9,200 Not applicable
Basic rate reduction at 20% £1,840 £2,000

The GAAP figure assumes the whole loan was used for the letting business. Borrowing above a property’s value often comes from releasing equity, and under GAAP that triggers a different test based on how the money was used; see remortgaging a buy to let.

When is the accruals basis the better choice?

  • Uneven rent timing. Large advance payments or arrears cleared just after the year end can bunch income into one year on the cash basis and push it into a higher band.
  • Borrowings above property values. If prices have fallen since the properties were first let, the cash basis cap in section 307C can cost relief every year.
  • Losses. Section 127BA of the Income Tax Act 2007 denies relief against general income for a property loss calculated on the cash basis. Under GAAP, the part of a loss that comes from capital allowances can be set sideways; see rental losses.
  • Commercial property with plant. Both bases relieve the cost, but on the cash basis the proceeds of a later disposal of an asset you deducted are taxed as income (section 307E), rather than going through a capital allowances pool.

For a typical residential landlord paid monthly in arrears, with modest borrowing, the cash basis is usually simpler and the results are very close. The wider comparison is on cash basis vs accruals accounting.

What happens when you move between bases?

Transitional rules stop income or expenses being counted twice or not at all. On entering the cash basis, rent already taxed as earned but unpaid is deducted, and expenses already deducted but unpaid are added back (PIM1096). On leaving it, the landlord works out an overall adjustment from rent owed, rent paid in advance and amounts owed to suppliers. A negative result is deducted in full in the first GAAP year. A positive result is spread over six tax years unless the landlord elects to accelerate it (PIM1098). These adjustments only arise where an existing business changes basis.

What are the common mistakes?

  • Treating the £150,000 limit as a profit figure, or testing each property separately.
  • Spouses taxed 50:50 on a joint property using different bases.
  • Using the date the agent paid over rent instead of the date the tenant paid the agent.
  • Claiming capital spending on a residential property as a cash basis deduction, when only replacement of domestic items relief is available.
  • Forgetting the section 307C cap after a remortgage or a fall in values.
  • Claiming sideways loss relief for a cash basis property loss.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.