When Kate and Gary Spearing decided to climb the property ladder they knew that finances would be very tight. So they converted the loft of their new home and took in a lodger to help pay the mortgage.
Now on their third tenant, they feel that overall it was the right decision for them. "Sharing the facilities can be a problem sometimes, but generally we've been very lucky," says Kate.
"The children really like having someone here, and we have used them to baby-sit on occasion. And, if Gary's away, it's nice for me to know that someone else is in the house."
And the negative? "Our first lodger used to leave the front door open, and bring loads of drunken people back from the pub." Fortunately, she didn't stay long, and the experience hasn't put them off. "The money is certainly very useful," says Kate.
Wot no tax? The rent-a-room scheme
Surprising though it may be, the income from renting out a room in your home is usually tax free, thanks to a government incentive to encourage people to take in lodgers.
This is the deal:
- The rent-a-room scheme allows you to let part of your home and generate a tax-free income of up to £4,250 a year. This equates to a monthly rent of just over £350.
- It can be a single room, or a whole floor of your house, as long it's furnished, and not a separate flat that you rent out (in which case you would pay tax in the normal way).
- You can also include an amount for laundry and meals.
- If the property is in joint names, you can simply split the allowance.
- The government doesn't distinguish between homeowners and renters. As long as your landlord agrees, there's no reason why tenants shouldn't benefit by taking in a lodger too.
How do I claim my allowance?
Claiming your allowance is easy. It works like this:
- If you don't normally receive a tax return, and your income from your lodger is below the tax-free threshold for the scheme, you don't need to do anything.
- If your receipts are above the £4,250, you must complete a tax return and claim the allowance.
- In the rent-a-room scheme you should keep a careful note of the rents you receive and your expenses, with any receipts or invoices, for a period of six years.
- If you earn more than the allowance in rent you will have to choose to either be taxed on the gross rent you receive over £4,250, or to pay tax under the normal rules.
Declaring your income in the usual way may be advantageous. For example, if you spent £6,000 renovating the room your lodger occupies, and only received £5,000 in rent.
Under the rent-a-room scheme, you can't deduct expenses, but under the normal tax rules, you would have made a loss and owe nothing. You may even be able to offset, or carry forward your loss.
If you want to opt out of the rent-a-room scheme you have to complete a tax return and declare the relevant lettings income and expenses on the property pages.
Seasonal Lodgers - Making A Profit From Events
pic:Wimbledon
If you don't fancy sharing your home full time, there may be other options.
People who live in Edinburgh famously make a killing renting rooms during the Festival, as do SW19 residents for Wimbledon, and Cheltenham-dwellers packing out their spare rooms with Irishmen during Gold Cup week.
But remember, even if it's only for a week a year, the tax threshold still applies, and sneaky tax inspectors have been known to follow up adverts for letting rooms in popular locations to catch tax dodgers.
Weekdays Only
Judy Niner was living in Oxfordshire, and working in London when, fed up with the commute, she decided to find somewhere to lay her head from Monday to Friday in town, and rent out her own spare room during the week.
"I didn't really want someone there at weekends, but I did want someone to help pay the mortgage. I knew I could do it tax free, so it was obviously a big incentive."
Judy found a lodger from Birmingham, who stayed with her for a year and a half, while she rented a room from a friend in London, and it worked out very well: "It was nice to know that someone was there when I was away."
Inspired by their arrangement, two years ago Judy set up MondaytoFriday.com a room-share agency specializing in weekday lodging.
"It's a good solution," says Judy. "You get an extra £350 a month, and, as your lodgers tend have their own place, they don't want to make somewhere a real home. They just want somewhere comfortable, secure and friendly."
As for the financial implications, Judy finds that her clients are often unaware of the tax break. "Quite often people don't declare it and think they're being naughty."
While others, says Judy, will put off renting out a room because they're worried about facing a big tax bill
Rent-a-Room Mortgages
For some people, like Kate and Gary, rental income is factored into their calculations when working out how much they can afford to spend on a new home, but few lenders take this into account when making a mortgage offer.
Bradford and Bingley currently have a rent-a-room tracker mortgage, available through brokers. And Cheltenham and Gloucester will include rent in your income multiple if you have a history of renting out.
James Cotton, Mortgage Specialist at London & Country Mortgages says: "Lenders don't have it as part of their criteria because it's not a very secure form of income.
However, "if you're a borderline case, with an existing lender, it's worth asking. And if you have a track record of renting out rooms you would be in a better position."
If your mortgage lender won't help you, James advises looking at self-certification mortgages, which are designed to take into account any unproven income.
This was the route Kate and Gary took: "We knew we couldn't do it without renting out, and, despite a few minor problems, I think it has worked well for us."
Choosing A Lodger
Last year Zurich Financial Services carried out research on lodgers and found that 75 per cent of people do nothing at all to vet their new housemate before ushering them through the front door.
With that in mind, here are some guidelines from MondaytoFriday.com on choosing a lodger:
1. Experian provides a pre-screening service for owners to check on lodgers for a small fee.
2. Ensure your prospective lodger provides references (bank or building society, employer, previous owner/landlordand).
3. You can check whether the individual has a criminal record.
4. Set up interviews with prospective tenants - find out about likes and dislikes; how much time they'll spend in the house; what work they do; how they spend their evenings; and explain house rules.
5. Remember, your property must be safe; care must be taken with regard to fire safety, electrical safety, gas safety (if applicable), furniture and furnishings and the general safety of the building (inside & outside).
6. You should inform your insurance company that you are letting a bedroom and ask them what additional cover you need. Also inform your mortgage company
7. Have a written agreement between you and your lodger. This should include: rent amount and payment details; which rooms/facilities the lodger is entitled to use; services you agree to provide; any share of household bills, how long until the payment amount is reviewed and house rule; notice period.
8. Request a minimum deposit of one month's rent in advance. This can be used against any unpaid rent/bills or in case any damage is made to the property.
9. Around 60% of the usual week-long rental is usually deemed appropriate for weekday only tenants.
10. Keep any valuables such as passports, credit cards and bank statements out of sight. With fraud being an increasing problem, you can never be too careful.
To obtain general advice on becoming a landlord visit The National Landlords Association website
Nikki Sheehan
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