Tax questiom for rental property

I bought our property on an interest only mortgage 3 years ago and mainly over the 6 months following spent c £40000 on improving it. My daughter then occupied it paying the interest on my loan but commencing shortly I will be renting it at market rate so expect to yield a net income after mortgage of around £12000 in tax year 21-22. What costs if any from those improvements 18-19 can be carried forward to offset tax. I am already a higher rate tax payer on marginal income which is pension related. I don’t currently complete a tax return and the property is owned jointly with my wife who is also a pensioned higher rate tax payer. Thanks

Depends what improvements were and when they were done. Improvements are normally a capital expense so can only be offset against capital gains tax when you sell the property.

If they were like for like replacement then you can offset against income, although only if it had already been rented by you, as it hadn’t been then it would still be classed as a capital expense and offset when you sell but not against income.

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The property doesn’t have to have been rented before the work was done, it had to be fit to be rented. It’s a fine line between capital and revenue. If you bought it at a huge discount, HMRC are more likely to argue capital.

This is the capital v revenue tool kit… Capital versus revenue expenditure toolkit - GOV.UK

More of a problem is that you rented it at an undervalue to a relative… Renting Property to ‘Connected' People Below Market Value - Tax Insider

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Is my takeaway from the second link that the revenue would tax me as if I let it at market rate since they take the view that my family gift was in fact from undeclared income? Since they only paid me enough to clear the mortgage interest could I argue that it wasn’t rental income but justa gift frame earnings? Many thanks - v helpful if someone worrying!

Many thanks for your reply

No, you couldn’t claim that they were just paying your interest and it wasn’t rent. Its rent.

Incidentally, what type of mortgage do you have? If its a buy to let then you may be in breach of your mortgage conditions by renting to family.

She does live there but her partner pays it and we do have a rental contract with him on a buy to let mortgage but her partner rents it at I suppose below market rent. Mortgage company hasn’t taken any interest in tenancy. It all feels unfair when my motivation is to prevent homelessness and a call on state funds and not at all to make a profit @

You mortgage firm may well find out and take an interest, particularly if its a residential mortgage and you have no consent to let.

Ummm, no, did you read it?

If you have had to replace due to damaged items or they were not working these can be offset against your taxable income from the rent.
If they were purely upgrades then no you can’t. However when you sell, any capital spent on improvements can be offset against your profit.
I would strongly advise you to keep good records if in the future you sell and need to claim against the profit. Be aware paper receipts fade even when they are in envelopes and lifts. Take photographs and file them away for safe keeping.