If you’re looking for a way of bringing in some extra money, you might consider renting out a spare room. Under the tax-saving rules, you can rent out a room and receive up to £7,500 a year in rent (or £625 a month) without paying tax, but the disadvantage is that you can’t offset expenses against tax. If you want to charge more than £7,500 a year, you can still use the rent-a-room scheme – you just have to pay tax on the excess income.
Pros and cons of the rent-a-room scheme
The rent-a-room scheme is pretty straightforward but that doesn’t mean it’s necessarily right for you.
– You don’t have to pay tax on your rental income (or rent plus the cost of laundry etc) up to £7,500 a year. The limit rose from £4,250 in April 2016.
– You can’t offset expenses against tax. These include wear and tear, insurance, heating or lighting.
SAVVY TIP: The list of expenses that you can offset against tax if you don’t take part in the rent-a-room scheme is quite long, so it’s definitely worth doing the sums before you make a decision.
– If you don’t use the rent-a-room scheme, you have to pay tax on rental income through your tax return in the normal way.
SAVVY TIP: If you want to opt into the rent-a-room scheme, you don’t have to do a thing if you receive less than £7,500 a year in rent. If you receive more than that, you can opt into the scheme by filling in a self assessment tax return and claiming the allowance.
Tips on renting to a lodger
Tessa Shepperson, a solicitor who set up a website and blog called The Lodger Landlord offers the following tips for lodger landlords (whether or not you’re using the rent-a-room scheme).
– Make sure you get permission. You don’t have to own the property in order to rent a room to a lodger and it shouldn’t be a problem if you’re renting from a social landlord. However, if you have an assured shorthold tenancy, you’ll need to ask the landlord.
SAVVY TIP: If you’re renting, your landlord may not object if you want to take in a lodger, but make sure you get permission in writing. If you own a leasehold flat, check the lease to make sure there are no clauses preventing you from renting a room to a lodger.
– Your council tax may increase. If you live in your property on your own, you must tell your local council that you’re no longer entitled to the single occupancy discount. If you rent out a room to a full time student, they should qualify for a discount so effectively aren’t counted.
– Inform your mortgage lender and insurer. Your mortgage lender shouldn’t object to you renting out a room but may ask you to fill in a form. However, according to insurance brokers, insurers may increase your premiums (sometimes quite dramatically) or refuse to cover for theft unless there’s evidence of a break in. Malicious damage may be excluded as well.
SAVVY TIP: Your insurer may also insist that you ask your lodger whether or not they have any previous convictions (they can only ask about unspent convictions, not ones that are already spent). This isn’t the kind of question that gets most landlord/lodger relationships off to the best start. The least intrusive option is to ask your lodger to fill in a form and include a question about previous convictions there (explaining that it’s for your insurance).
– Consider getting a lodger agreement. You may feel that you know the person well enough not to bother with an agreement, but you might regret it if things go wrong.
SAVVY TIP: It doesn’t have to run to pages, it just has to cover the basics, such as notice periods, anti social behaviour and guests.
The government’s Gov.uk website has information about the Rent a room scheme.
The Gov.uk website also has information about Council Tax.
The Lodger Landlord blog has an article called 21 tips on renting to a lodger.
The website MondaytoFriday.com is aimed at people who want to rent/rent out a room on weekdays only.
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