The BBC News Ask the Expert column gives readers a chance to have their financial questions answered.
This week's expert is tax manager Simon Rees
Syed Zaffar asks:
"I recently bought my first house and re-decorated the kitchen, bathrooms and replaced the carpets.
I then rented it out as my job with the Army keeps me very mobile.
First, can I claim back any tax from Revenue & Customs on the expenditure which is approx around £40,000?
Also, can I claim any relief or rebate on any interest which I pay towards my mortgage? "
This week's expert is Simon Rees, a senior tax manager at PricewaterhouseCoopers.
Simon Rees says:
The first principle here is that the income you earn from renting out your property is taxable and you will need to declare it on your tax return.
When calculating the taxable amount, you can deduct various letting expenses.
This will give you your net rental profit (or loss) for the year.
If the property is owned jointly, the net profit or loss will be split equally between the joint owners.
This can be useful if you have a spouse with available allowances or lower tax bands.
Generally, you can deduct expenses as long as they were incurred wholly and exclusively for the purpose of renting out your property, and are not capital in nature.
You can also claim relief for expenses incurred before the rental starts, provided they were incurred within seven years of letting and satisfy the same criteria.
In your case you need to consider if the £40,000 of costs in redecorating your property will in fact be an allowable expense.
The question here is twofold: was the expenditure incurred wholly and exclusively for the rental business (not for your personal reasons) and, if so, was the expenditure capital or revenue?
Capital or revenue?
First, you must ask yourself if the work was done in contemplation of letting the house to tenants, or was it to bring the property up to your own living standards?
If - and it sounds like a big "if" in your case - the works were carried out with a view to letting, you must then decide if the expenses are capital or revenue.
To do this you will need to review each individual item.
But broadly, expenditure will be capital where it provides a substantial improvement to the property, beyond that afforded by a normal repair.
This could mean that the cost of fitting a new kitchen or bathroom is likely to be regarded as capital.
If that is the case then it cannot be used to reduce the amount of rent that will be taxed.
However the cost of things like redecorating or replacing carpets are likely to be revenue and so allowable.
What about mortgage interest?
You can indeed claim your mortgage interest against rental.
The deduction is for the interest element of your payment only, so you cannot include any repayment of capital or amounts paid into an endowment policy.
There are a number of other expenses that can be claimed against tax, including:
- Repairs and maintenance
- Buildings and contents insurance
- Letting agent's management fees/commissions
- Cost of advertising
- Utility bills, water rates
- Gardener/cleaning costs
- Safety inspections
The way you treat repairs may depend on whether the property is let unfurnished or furnished.
For unfurnished property, deductions are claimed on the renewals basis - this means the original cost of something like a cooker is not allowed, but you can claim the full cost of replacing it when it wears out.
If the property is let furnished, you can instead claim the "wear and tear" allowance.
This provides an annual deduction calculated as 10% of your rental income (less rates), and is designed to meet the costs of replacing items such as soft furnishings or kitchen appliances.
You will be able to claim this annual allowance regardless of whether actual expenditure is incurred.
(You cannot then claim for the actual cost when you do replace such items!)
Fixtures and fittings
You can also deduct the cost of replacing fixtures that are an integral part of the building, such as a broken shower or heating system (to the extent that the new item is not a substantial improvement).
If your expenses exceed your rental income you can claim a loss.
This loss cannot be offset against your other income, but can be carried forward to the next tax year and deducted from future rental profits.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.