Boost Your Income: Discover How Renting Out a Room Can Pay Off!

Understanding the Lodger Concept

A lodger is distinct from a tenant in that they rent a room within a household and typically share common areas like the kitchen and bathroom with the homeowner, whereas tenants usually occupy an entire property independently.

Lodgers do not have exclusive access to any part of your home, allowing you as the homeowner to enter their room, though it’s essential to respect their privacy.

Matt Hutchinson, a director at SpareRoom, explains that tenants have more rights compared to lodgers due to different legal recognitions between homeowners and landlords, necessitating distinct guidelines when sharing a home.

He notes that homeowners provide rooms (always furnished) to lodgers under a licence, not a tenancy agreement, clarifying terms of their stay at your property.

“For instance, you’re only required to give ‘reasonable’ notice to ask a lodger to leave, often equal to the rent payment period—usually a month, but potentially shorter. Neither party is bound by a minimum stay requirement,” he adds.

Landlords living in the property may take a deposit from lodgers, but unlike landlords renting entire properties under an assured shorthold tenancy (AST), they are not obliged to secure the deposit in a protection scheme.

Eligibility for Hosting a Lodger

Most property owners are eligible to host a lodger. However, those with a mortgage should first consult with their lender.

Mark Harris, CEO of mortgage broker SPF Private Clients, advises, “While many lenders are accommodating of lodgers, some may impose conditions such as limiting the number of lodgers. For example, Principality allows only one, whereas Nationwide and Santander permit up to two. Some lenders may prohibit lodgers entirely.”

It’s important to note that renting rooms to more than two individuals might classify your home as a ‘house in multiple occupation’ (HMO), subject to additional local authority requirements and possibly needing a licence.

Leasehold homeowners should verify if they need permission from the freeholder to sublet a portion of their residence. Council and private tenants might also host lodgers, provided they obtain respective permissions from authorities or landlords.

Selecting the Ideal Lodger

SpareRoom remains a primary resource for finding lodgers and flatmates. In addition to posting your available room, you can browse ‘room wanted’ ads and sign up for notifications to stay informed about potential lodgers in your area.

Other useful platforms include Roomies UK and Ideal Flatmate, with MondaytoFriday and GetDigs UK specializing in weekday rentals.

Don’t underestimate the power of word of mouth; ask friends, family, or coworkers if they know anyone in need of a room. Also, consider using social media, such as local Facebook groups, to broaden your search.

Tax-Free Earnings up to £7,500

The government’s “rent a room” scheme permits you to earn up to £7,500 per year (£625 monthly) tax-free by renting out furnished living spaces in your home. If you share this income with another person, the threshold reduces to £3,750. Most landlords who live in the property include utilities in the rental cost.

To set an appropriate rent, compare local rates for similar rooms and adjust based on factors like room size, condition, shared areas, and location.

All charges to your lodger, including for additional services like cleaning, meals, or laundry, count toward this income limit.

You don’t need to take any action unless your earnings exceed the threshold, at which point you must pay income tax on the excess amount.

“Since its last update in 2016, the tax-free threshold hasn’t kept pace with average room rents, leading many who rent out rooms to surpass this limit. Those who do must opt into the scheme and file a tax return to claim their allowance,” Hutchinson remarks.

Research Before Committing

It’s crucial to ensure compatibility when choosing a lodger. A brief conversation can help determine if their lifestyle and personality mesh with yours. Discuss aspects like working hours, whether they work from home, smoking, pets, frequent guests, cleaning habits, and expectations.

In England, a “right to rent” check is mandatory to confirm the legal residency status of potential lodgers. Failure to perform this check can result in fines or imprisonment. Verify their eligibility by reviewing necessary documents, with online resources available to assist in this process.

Additionally, consider conducting credit checks and requesting references before finalizing any agreements.

Establishing a Lodger Agreement

Use a “lodger agreement” or “licence to occupy” to outline the terms of renting a room in your home. This differs from an AST, which is applicable when renting out an entire property.

Your agreement can specify rules regarding overnight guests, noise levels, cleaning duties, and use of shared areas.

Documenting these details from the start can help prevent misunderstandings later. The agreement should clearly state the rent amount, payment intervals, payment methods, and any required notice periods.

Financial Considerations with Lodgers

If you receive benefits, it’s imperative to inform the Department for Work and Pensions at your local jobcentre right away after taking in a lodger, as this can affect your entitlements. Ignoring this step may lead to overpayments, penalties, or fraud charges.

Hosting a lodger typically ends the 25% single-person discount on council tax, unless the lodger is a full-time student, in which case the discount may still apply.

Informing Your Home Insurer

Inform your buildings and contents insurer about your lodger to avoid policy invalidation. You might need a special policy that covers lodgers, or you may need to pay an additional premium on your existing policy.

Be aware of potential exclusions added to your policy, such as theft without forced entry. Verify whether your policy extends to your lodger’s belongings, or if they should secure their own insurance.

Preparing the Room

To qualify for tax-free earnings under the ‘rent a room’ scheme, ensure the room is adequately furnished, providing essentials like a bed, storage solutions, and a desk or table if space permits.

Compliance with fire safety standards is mandatory, including the provision of working smoke alarms and fire-resistant furnishings. Gas safety regulations also require annual checks of gas appliances by a certified engineer.

Assisting on Move-In Day

Being present when your lodger moves in is helpful. While it’s not necessary to oversee their unpacking, being available to answer questions can facilitate a smoother transition. Ensure they know how to reach you if needed.