Ever considered taking in a lodger? A lodger can be a great way of generating income; many thousands of people earn extra income in this way.
To start with, I’m going to list a few of the perks and pitfalls for accommodating lodgers:
The positives of taking in a lodger
- most obviously, it’s a great way of earning extra cash, which can ultimately help you pay your mortgage and support other financial expenditures you may have
- The Inland Revenue allow you to earn up to £4250 per year (Just over Â£350 per month) tax-free through the rent-a-room scheme. To be valid for the scheme (tax-free policy), you need to stick to a few rules, which I’ll cover later.
- Your lodger has a license to occupy your premises and not a full tenancy – no interest in the property – therefore it’s a much simpler process to remove unsuitable lodgers than it is tenants You have much more control over the situation with a lodger than you do with full tenants. This is because Lodgers occupy your home on licence, and they do not have security of tenure – unlike tenants. Lodgers cannot call the place their own, therefore they have no right to stay on if you give them notice to leave.
- If you live alone, a lodger’s presence alone can provide you with security
- Good lodgers can become great friends; they can even become free house sitters, child and pet minders. Let’s face it, living with someone new and random could be fun; you may find yourself with a new drinking partner
The negatives of taking in a lodger
- you could potentially end up living with a stranger. So it’s important you get someone trust worthy in. It’s always best if you can get a friend in, or a friend-of-a-friend; basically anyone that comes with a good recommendation from someone you can trust.
- you’ll have to provide a communal area, such as a bathroom and kitchen.
- you may find it more difficult to gain personal space and “alone time” around the house. So walking around in your undies or cooking naked may no longer be an option. Unless, of course, by some miracle you’re both nudists! In that case, game on.
- Lodgers and landlords aren’t always going to agree on everything, so the odd debate here and there is more than possible.
- Your tenant has the right to invite guests over, so you may have to play host for random guests and have unknown faces around your house.
The Rent a Room scheme
The main benefit of getting a lodger is that you can apply for the “rent a room scheme”, which as mentioned, entitles you to a tax free income of up to £4250. The Rent a Room scheme is an optional exemption scheme from renting furnished accommodation in your only or main home.
To avoid creating full tenancies and to qualify for the rent-a-room scheme, you must meet the following requirements:
- The room you let must be in your main residence, where you live most of the year. If you move out the lodger could become a full tenant by default.
- The lodger must not have exclusive possession of a self-contained part of your property. Cooking facilities and bathroom etc. need to be shared with you.
- The room you let must be for the lodger to live in, not to run a business.
- If you are a tenant yourself you will need permission from your own landlord before you take a lodger. You will need permission in writing.
- You will need to inform your insurers – they may want to change the cover slightly, and it’s a good idea to ask the lodger to insure their own possessions. It’s unlikely your household insurance will cover the lodger’s possessions.
- You need to inform your mortgage lender, though it’s unlikely they will have any objections.
The advantages and disadvantages of the scheme
Although the scheme sounds like a decent deal, it might not be for you; it’s simply a matter of working out what is best for you. The principal point to bear in mind is that if you are in the Rent a Room scheme you can’t claim any expenses relating to the letting, for example, wear and tear, insurance, repairs, heating and lighting.
To work out whether you will be better off joining the scheme or declaring all of your letting income and claiming expenses on your tax return you need to compare the following:
- how much income you are left with after your expenses
- the amount of your receipts (rent plus any income from laundry services, meals, etc) over £4,250 or £2,125 if letting jointly (2007-2008 tax year)
- If you opt out of the scheme (or simply do nothing) you will pay income tax on the first amount. If you opt into the scheme you will pay tax on the second amount.
Extra “rent a room scheme” notes
- You will not need to worry about health and safety, environmental health and gas checks, as you would with a full tenant. However, it never hurts to make take those precautions regardless.
- As mentioned, you’re taking a huge risk when taking in a stranger as a lodger. We all tend to be too trusting of people we don’t know – letting a complete stranger into your home is a risk.
- It is most advisable to verify the lodger thoroughly. You should carry out credit searches and referencing on prospective lodgers, just as you would a tenant – unless you know they are genuine or they come recommended from a reliable source.
- Legally you don’t need a formal agreement, but it is an extremely good idea to have one, as it can prevent a lot of arguments later.
- Renting out a room may also affect your contents insurance. Most insurers will put up premiums, but it’s still important to inform them if you want to be sure that your belongings are protected. If you don’t tell them, the insurance may not be valid.
- Taking in a lodger will most likely affect the amount of benefits you get if you’re claiming. For example, if you’re receiving housing benefit and you take in a lodger, the amount you get will almost certainly be reduced as they’ll assume your lodger is paying rent. This will be the case even if your lodger is living rent-free. If you simply don’t tell them, you may end up having to repay an overpayment, or be prosecuted for fraud.
Have you ever been a lodger or taken in a lodger or even simply considered taken in a lodger? Tell me about it…