aking on a lodger is much simpler - and has less financial risk - than renting out a whole property, and many landlords choose to start their careers this way. Lodgers have significantly less security of tenure than a tenant. In fact a lodger is not even really a tenant - they have what's known a 'licence to occupy'. By letting a room to a lodger you become their 'licensor' not their landlord as such, although the distinction is not well understood and so the generic term 'landlord' is used overwhelmingly.
Letting a room to a lodger is a useful source of tax-free income. In fact you can make as much as £4250 per year in rental income without even having to declare it to the taxman. This is one of the few genuine tax 'loopholes' available today, and is driven by the government's desire to encourage people to make more efficient use of their living space. The United Kingdom has a high demand for housing that is not currently being met, and squeezing more people into the existing housing stock is a way to alleviate the problem.
Despite a lodger's inferior rights vis-a-vis a tenant you would still run the same selection process - getting background and credit checks carried out and securing references from previous landlords/licensors if there were any. A lodger is going to be sharing your space with you and your family, so you want to be doubly sure they are of sound mind. Although a lodger is technically much easier to get rid of than a tenant, you still don't want to be landed with the job of getting rid of a psychopath.
Aside from watching out for crazy would-be tenants you have other safety issues to take care of - you must have an annual gas safety test carried out just like you would do on a self-contained property you rented out. It would also be wise to have an electrical test on the wiring and the appliances carried out, although it is not a legal requirement like the gas test. Also you should carry out a risk assessment at your property. Things you've been living with for years and not been bothered about (no banister rails for example) might cause an accident and provide someone with a reason to sue. Also if you're going to provide any furniture for your lodger to use, it should be fire labelled and meet current standards. You'll also need to tell your home insurance company that you're letting a room.
Those last 2 paragraphs have covered preparation, so what happens when you've got your property ready and have found a suitable licensee? The next step is an agreement. While - just like an assured shorthold tenancy - there is no need legally to have the terms of your lodger's licence put down on paper and signed by both parties, it would be an eminently sensible thing to do. Your agreement needs to specify the rent, the notice period, any exclusions from the rental and so on. If this sounds like a headache, it will certainly be less of one than any dispute that erupts in the course of a tenancy without a written agreement in place. There is a free copy of a license in our freely available tenancy agreement pack that you can download form our site for free with no obligation.
With regards to rent payment and notice, it would be better in our opinion to set up some kind of automated rent payment like standing order, as having to ask your lodger every week/month could get a bit annoying. When it comes to notice, no amount is specified in law, so setting a reasonable amount out in the agreement (say 2 weeks) would be sensible. Perform a videotaped inventory of the property before the lodger moves in and take a deposit of one month's rent or more. Because you're not letting under an Assured Shorthold Tenancy you do not need to protect the deposit with a government-approved scheme.
Lodging financial facts:
- Renting part of your home to a lodger is a great way of getting some tax-free income.
- 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.
- You can rent a single room, or a whole floor of your house, as long it's furnished and is actually part of your home and not self-contained.
- If the property is in joint names, you can split the allowance.
- It works for both homeowners and renters: as long as landlords agree then there's no reason why tenants can't have lodgers.
- 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 even have to mention it to the taxman.
- If your rental income is above £4,250 per annum you must complete a tax return and claim the allowance.
- 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.