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What Are the Considerations When Taking on a Lodger?

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Many homeowners will have times during their occupation when finances are tight and making the monthly repayments is tough. When these times hit there are three basic options, namely; Reduce other expenditure, dip into savings or increase monthly income.

If we assume that you have already revised your budget to save costs and you don’t have (or would rather not dip into) savings then the last alternative is to increase income. Of course, most of us already work a full week, so on the face of it, this seems easier said than done.

But there’s another option. If your home has a spare room you might consider letting it to generate a monthly income. But how do you go about such a thing and what are the pitfalls you should consider?

First of all, you need to consider whether you are creating a landlord and tenant relationship or simply taking in a lodger. This is important as there are a variety of obligations and rights associated with the former that are not necessarily shared with the latter.

The easiest way to test whether you have a lodger or a tenant is to check whether the person renting from you has what is called ‘exclusive possession’. Do they have exclusive use of their own toilet and kitchen?Do they have a lock on their door to which you don’t hold a key and/or have not accessed without permission? If so, you might be inadvertently granting them a tenancy and it’s important that you take advice if you are unsure.

If you are simply letting a bedroom in your own home (where you live) and the person renting it shares with you common areas such as a kitchen, living room, etc then you likely have a lodger. A lodger will probably pay you an all-inclusive rent, possibly weekly or monthly. The rent will probably include a contribution to utilities and they may receive services such as laundered towels or a cleaner. The lodger has a contractual relationship with you but fewer rights than a tenant would enjoy, including no ‘security of tenure’ per se.

Once you have established that what you are creating is not a tenancy, the next thing to decide is what is included in the lodger’s weekly ‘rent’ and other terms of the agreement. This might include how much notice you intend to give them although you should perhaps reserve the right to terminate the agreement with immediate effect. The periodic nature of the payment of rent will likely have a bearing here.

Next, consider whether you need to adjust your home insurance policy to allow for this change in circumstances. Also, do you need to do any checks on the person ? We’d suggest you take two or three references as a minimum. After all, they are going to be living in your home!

The next thing to consider is your tax liability. Every time you accrue income or a capital gain you are likely to be incurring a liability to declare it for tax purposes and failure to do so is a serious matter. However, unlike when owning a buy-to-let property, rent from a lodger is treated differently in England & Wales by HMRC. Under the Rent a Room Scheme You may receive up to £7,500 in profit per annum from a lodger without having to pay tax. If you share ownership with another this gross allowance is split between you.

In order for this Rent a Room Scheme to be applicable you must be renting a furnished room in your own home in which you live. Income from Bed & Breakfast activities could be included in this allowance but any rental activity undertaken as a business (i.e. where you provide a service – such as cleaning, etc) should be covered. However, the resident may not carry out a trade or business although he may work from home during the evening. The property must be furnished.

Perhaps most importantly, consider whether you are willing to share your home with a stranger? This is perhaps more important if you have a family, but most of us have experience of shared accommodation when younger and there are always frustrations. Remember, it is your home, so if you decide to let a room make sure you choose your lodger carefully and agree the rules of your home before you give them a key to the front door.

For advice on letting your Bracknell home or investing in a buy-to-let opportunity contact us at Duncan Yeardley.

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