Under changes announced in the summer budget, the Chancellor George Osborne raised ‘rent a room’ tax relief from £4,250 up to £7,500. You can earn this amount from renting out one or more spare rooms in your property, without paying any tax at all.
The increase in rent a room relief will come into effect from April 6, 2016, so the £4,250 limit, first introduced in 1997, will remain until then.
If you earn more than the threshold, you must complete a tax return, and you can claim your tax-free allowance on the return.
Anthony Thomas, chairman of tax charity the Low Incomes Tax Reform Group (LITRG), said: “The increase in the rent-a-room relief limit could not only help various groups, including first-time buyers, those struggling to meet mortgage payments and those seeking affordable housing. It may also allow some individuals to be taken out of self-assessment, if they only complete a tax return because of rental income above the current rent-a-room relief limit.”
Can anyone let a room out?
You can take advantage of the rent a room scheme whether you rent or own your home, although if you’re renting you will need to check whether your tenancy agreement allows a lodger.
If permission is required, it’s sensible to get this in writing from your landlord to avoid any disagreements later on.
What else you need to know
Renting out a room isn’t as simple as just handing over your spare set of keys to anyone looking for accommodation.
You must let your home contents insurer know you’ll be taking in a lodger. If you don’t, then your cover could be invalidated in the event of a claim.
You might have to pay a bit extra to extend your cover, as it may have to include extra liability cover in case the lodger takes you to court if, for example, they slip over in the bathroom and hurt themselves.
The insurer might also exclude any theft claims you make if there’s no sign that anyone has broken in to your property.
Some insurers might refuse to cover you at all, because they consider you having a lodger in your home too great a security risk. Other will require that your lodger must be employed, or must not be a student.
Insurers are unlikely to cover lodgers with criminal convictions.
If your current home insurer refuses to cover you if you have a lodger, don’t despair. Shop around for alternative cover, and consider specialist landlord-lodger policies which are designed for people letting out rooms.
Renting out a room isn’t as simple as just handing over your spare set of keys to anyone looking for accommodation
Other people you’ll need to inform
Your insurer isn’t the only company you need to notify if you want to let out a room. You should also let your mortgage lender know you are planning on taking in a lodger.
Many mortgages contain a clause which requires you to get permission before renting out any part of the property.
If you’re a leaseholder, you should check with your landlord as to whether they are happy for you to take in a lodger. This information may be shown on your lease agreement so check this first.
If you don’t seek permission when you should, then your landlord or lender could take action against you, such as removing any special mortgage deal you are currently on.
You must also let your local authority know if you take in a lodger, as this could affect your single person's council tax discount if you live alone.
If, for example, you’re only taking in a lodger, say, from Monday to Friday, you may be able to keep your discount, provided your lodger is already paying council tax at another primary residence.
Do background checks
Make sure you thoroughly vet anyone you are considering renting a room to. Ask them about their interests and hobbies, so you can ensure your lifestyles match.
For example, if you’re a home-body and like being in bed by 10pm, you don’t want to rent your room out to a party animal who always has friends round and regularly comes home in the small hours.
Ask for a reference from your potential lodger’s employer or previous landlord and if you agree to let them stay with you, make sure you get a deposit, usually a month’s rent.
Sites where you can advertise your room to lodgers include crashpadders.com, MondaytoFriday.com and spareroom.co.uk.
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