The government’s Rent a Room Scheme means you can let a furnished room
(or as much of your home as you like) to a lodger and earn up to £7,500 a year, tax free.
But it’s not – or shouldn’t be! - as simple as opening your door and handing over a spare set of keys. There are a number of things it’s important you understand before you take in a lodger.
Importantly, if you’ve got a mortgage, you’ve got to check with your lender that they’re happy for you to rent out part of the property. In reality, they’re unlikely to say no, but mortgage contracts often contain a term that requires you to get the lender's permission.
What type of tenant is your lodger and what are their rights?
The lodger’s rights depend on whether they share facilities – such as a bathroom, kitchen or living room – with you or another member of your family. If they do, they are an ‘excluded occupier’, which means they have far fewer rights than a tenant renting a whole property. Because they haven’t been granted ‘exclusive possession’ of the room, you can enter the room at reasonable times to check its condition and if you want them to leave, you only have to give them reasonable notice and you don’t have to go to court to evict them.
(How long ‘reasonable notice’ is, is likely to depend on how long the lodger’s been there, how well they’ve behaved and how often they pay rent.)
But if they’ve got their own, private facilities that aren’t shared with anyone else, they are an ‘occupier with basic protection’. That means if they refuse to leave when you ask them to, you’ll have to go down the formal route of obtaining a court order to get them out of your home.
What kind of agreement do you need?
Although you don’t have to have a formal written agreement, it’s highly advisable, so that there’s a clear record of what both you and your tenant understand the terms to be. The agreement is usually a licence or an ‘excluded tenancy agreement’ and it should state:
- the amount of rent payable
- the level of deposit required (if any)
- that the lodger has the right to use the common areas in the property
- the landlord's responsibilities
- what the lodger can and can’t do at the property
- how each party can end the agreement.
As with an AST, if the agreement is for a fixed term, the tenant can’t leave until that term ends. If they do, they have to pay you rent for the whole period.
And, because you’re a resident landlord, any deposit you take at the start of the tenancy doesn’t need to be protected it in a government-approved scheme.
Rent and bills
You can charge whatever rent you like, but you should find out what others are charging locally, to make sure it’s reasonable. If it’s paid weekly, you’re legally obliged to provide a rent book to record all payments made and received.
As far as bills are concerned:
- Council Tax: you’re responsible for paying it, so it’s fair to include part of the cost in your tenant’s rent. Bear in mind that if you previously lived alone, you’re no longer entitled to the 25% single-person discount and you’ve got to inform the council - unless your lodger is a ‘disregarded person’, e.g. a full-time student. This is something you should check with your local council.
- Utility bills: again, it’s fair to include a proportionate charge for this in the rent but you cannot charge them more than you’ve paid your suppliers. If you do, you could face civil proceedings.
Having a lodger might also affect the cost of your contents insurance, so check with your insurer before accepting a lodger, to make sure you don’t invalidate your policy.
What are the tax implications of having a lodger?
Extra income from rent might affect your entitlement to benefits and tax credits. So if you’re currently receiving any kind of aid or allowances, you should speak to an adviser before taking in a lodger.
The rent you receive has to be declared as income, so is liable to income tax – although the first £7,500 is tax free. You should also check whether you will be liable for any capital gains tax when you come to sell the property. You may have to pay some CGT if you’ve let out all or part of your home, or if you’ve taken in more than one tenant or lodger at a time.
So, if you’re thinking of letting a room in your home, make sure you do these three things before going ahead:
- Speak to your mortgage lender to check you’re not breaching any of the terms of your loan agreement
- Speak to a financial adviser about the tax and benefit implications of earning rental income
- Consult a legal lettings expert to ensure you have the right kind of tenancy or licence agreement.
If you need any help finding the right people to speak to, call into your local Reeds Rains branch and we’ll be happy to discuss your requirements further with you.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
This firm usually charges a fee for mortgage advice. The amount of the fee will depend upon your circumstances and will be discussed and agreed with you at the earliest opportunity.