Make your spare room make you money: get a lodger!
This article is now out of date. For the latest information, please read Rent A Room scheme: tax-free cash from your spare room
Taking in a lodger may seem pretty radical, but there are obvious advantages for both landlord and tenant. For the landlord, renting out a spare room can help you earn some extra money, while the lodger has a better chance of being offered good quality accommodation because the landlord is living there too.
Demand from tenants is strong as would-be first-time buyers are being forced into delaying property purchases. These days, lodgers are often professionals who want a decent place to live, but simply can’t afford to buy themselves.
And foreign language students often prefer to lodge with a family rather than rent - they get the benefit of family life when far from home, and the family can benefit from a housemate from a different culture. And an added bonus might be that you all start to learn your lodger's language, too!
Rent a Room
Renting your spare room doesn’t have to be complicated. Thanks to the government’s Rent a Room scheme, you can earn up to £4,250 in rental income without paying a single penny in tax. If you rent out a room jointly -- perhaps as a couple -- you can each earn up to £2,125 tax-free.
Better still, you won’t have to declare this income if you don’t normally complete a tax return, and there's no need to apply for the scheme either. The exemption is automatic -- what could be easier?
That means you could earn over £350 a month from your spare room totally tax-free! You don’t even need to be a homeowner to benefit from the scheme. If you’re a tenant yourself -- and your landlord agrees -- you can rent out a room too.
Of course, there are some rules:
- The room you let has to be furnished.
- It has to be a room in your main residence.
- The lodger can occupy a single room or an entire floor, but it must be part of your home and cooking and bathroom facilities should be shared.
- You must carry out annual gas safety checks on your boiler, and provide smoke alarms and fire-resistant furniture. Visit the Direct.gov website for more details.
- You can’t claim for any expenses such as wear and tear, repairs or insurance.
- If you're going to charge for other services, such as meals or laundry, you'll need to add this amount to the rent to work out the total.
- If you live alone and claim the single person's council tax discount, you will lose this if you take in a lodger, unless they are exempt from paying council tax.
- If your rental income is above £4,250, you must complete a tax return and claim the allowance.
You could boost your income temporarily by taking on seasonal lodgers if you live somewhere likely to attract visitors. For example, residents have done so in Edinburgh during the festival. And many people are renting out rooms for the Olympics this year.
If you don’t fancy sharing your home all the time, think about letting out a room Monday to Friday. This can be useful for workers in your area who want to avoid a long commute home. As a general rule, 60% of the normal weekly rent is usually appropriate for a weekday lodger.
Where to advertise for a lodger
Good websites to check out include the free classifieds site Loot, Easyroommate, Gumtree, and MondaytoFriday (this is a great website if you don't want your lodger around at weekends). You could also place notices in local shops, hospitals, large employers and universities/colleges (if you're looking for staff or foreign language students).
You must use a tenancy deposit protection scheme if you are taking a deposit from a tenant. This protects the tenant's deposit while he or she is renting the property.
Check your mortgage's terms and conditions
Most lenders should be fine with you taking in a lodger, but you should contact them and tell them what you're planning to do before you advertise your room for rent.
Check your insurance
Another important point to note if you decide to take in a lodger is that you'll need to carefully review your home insurance policy.
For a start, you must make sure you tell your insurer if you are planning to rent out a room. If you fail to do so, any cover you already have in place could end up being declared void. Be warned though that you may have to pay a premium on your home insurance for taking in a lodger.
Some insurers will also only cover you for one lodger, while others will cover you for more. It's also worth keeping in mind that some insurers, such as Direct Line, won't cover students as they are classed as high risk.
However, even if you're covered, be aware that the level of cover you have could be impacted by taking in a lodger. For example, claims for accidental damage, attempted theft, vandalism or malicious acts may not be covered. Theft cover may only be included if there has been evidence of forcible entry. So make sure you check the terms and conditions of your policy carefully.
That said, you may find that each case is reviewed separately - for example, esure points out that a lodger who's a cousin or a friend of the family would be a far lower risk than someone who answered a classified ad.
It's also very likely that your tenant will need to get his/her own contents insurance policy as your tenant's contents probably won't be covered under your main policy. Unfortunately, standard home contents policies generally won't cover a bedroom in a property because it has to have its own locked door. So your tenant would need to apply to an insurer that specialises in renters to see whether he/she could get cover. Endsleigh is one of the few insurers to offer shared house contents insurance.
The next big question is what happens to your home insurance policy if your tenant has an unspent criminal conviction? Unspent convictions can invalidate your policy.
This can have serious consequences. If, for example, your home burns down and your tenant had an unspent conviction, even if it's conviction for something as minor as overpayment of benefit, your buildings insurer could refuse to pay out.
So if you're taking in a lodger, you need to be able to prove you took reasonable steps to find out whether your tenant has an unspent criminal conviction. For example, you should also be able show you performed reasonable checks on your lodger's background and history (such as performing a credit check, and asking for references from your tenant's employer and bank), as your insurer may ask for proof of this later. You may also wish to get your tenant to sign a declaration that he or she has no unspent criminal convictions, and get this witnessed. (Make sure you put a date on this document.)
The good news, however, is that if you take these steps and say, the tenant lies to you, then the policy is likely to remain valid. In other words, if you've taken reasonable steps to find out about any unspent criminal convictions, then you should be OK and a pay-out should be made. If it isn't, you can go to the Financial Ombudsman Service for redress.
Top tips for finding a good lodger
Follow these tips to avoid letting your spare room to the wrong person:
- Interview prospective tenants. Find out how much time they'll spend in the house, how they spend their evenings and weekends and what they do for a living. Make sure you cover the house rules.
- Carry out a tenant check before you agree to take someone into your home. You could try the National Landlords Association. Don’t forget there will be a fee.
- Ask your prospective lodger to provide references from their bank or building society and their employer or previous landlord. You could even ask for a character reference.
- Write up a formal agreement between you and your new lodger. Include the following details:
- The amount of rent including any share of the household bills
- When and how the rent is to be paid
- When the rent will be reviewed
- The notice period
- Which rooms or facilities your lodger is entitled to use.
- Any house rules which you feel are relevant.
- Ask for a deposit of at least month's rent upfront. You can use this to cover the cost of any unpaid rent or damage to your home.
- Keep a careful record of the rents you receive and any expenses you incur. You must retain these for six years following the tax year end.
You can get plenty more tips and advice from the National Landlords Association.
If you like the idea of sharing your home for extra cash, then go for it. But be careful not to rely on it too heavily. After all, lodgers can leave at short notice and you don’t want to be left in the lurch.
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