If you are strapped for cash by the credit crunch, take an increasingly popular route and collect up to £300 per month tax-free by renting a room in your home.
Whether you own the property or are letting it, you are entitled to receive up to £4,250 a year from lodgers under the Rent A Room scheme without having to pay any tax on it. If the ownership or tenancy is joint, each of a couple can have tax-free income up to £2,125.
You cannot claim the allowance unless it is your main home. So it doesn’t work for professional landlords. And you can only claim the allowance if the accommodation is furnished and the lodger shares some common rooms - self-contained flats aren’t eligible.
Growing interest
There’s been a proliferation of websites offering such accommodation recently. The credit crunch has stopped people buying, but it hasn’t reduced the growth in the number of people wanting accommodation. So if you’re in an urban location with reasonable access to transport you’ll probably get several applications if you advertise.
Personally, I wouldn’t advertise. Sharing your home is a pretty big deal. However carefully you check people out, how sure can you be that they are genuine and honest? Get the grapevine working for you, use your network of friends and acquaintances and make sure that anyone you consider as a potential lodger is personally known to someone you know and trust.
In theory you don’t need a legal agreement with a lodger: you’re entitled to kick them out at any time, even if they do pay their rent. They cannot acquire tenancy rights by being in your home. But a suitable legal agreement only costs a tenner and it may be worth introducing this formal element to make the lodger aware of their responsibilities.
There are variations. Say you’re away all week, or every weekend. Then you can rent your property or part of it for the time you’re not there. Or let a room on an ‘occasional’ basis where the lodger uses it, say, once or twice a week. Such fractional letting can qualify under the Rent-A Room scheme.
Get wise to the tax rules
The tax rules on Rent A Room differ from normal letting. With RAR you don’t get any deductions for costs. The total gross income you get from the lodger - including any extra charges such as use of telephone or laundry - counts towards the £4,250 limit.
If your rental income would be a lot more than that, but you would also have a lot of expenses, you might be better off outside the scheme, though that’s unlikely. Say you had a big home and let two rooms and got an income of £6,250 over the tax year. If you’re in the RAR scheme, £4,250 is tax free and the remaining £2,000 is taxed – you can’t claim any offsetting expenses. If you were outside RAR, you could deduct all your expenses from the £6,250 income, and only the net income would be taxable. But those expenses would have to come to more than £4,250 in order for you to be better off – this would leave you with net taxable income of £2,000, the same as if you were in RAR.
I’m sure many people don’t actually declare their income from lodgers on their tax return, though it includes a section for the RAR scheme. In theory you are breaking the law and could incur penalties if the taxman found out. In practice, provided your income is less than the £4,250 RAR limit, this is very unlikely, because the taxman hasn’t actually lost anything as a result of your non-declaration. But if your income exceeds the RAR limit, then be aware that not declaring this income could land you in trouble. The taxmen do monitor property letting websites.
