Homeowners throughout the UK are learning how easy and rewarding it can be to welcome lodgers into their home for additional income. As living costs increase, millions are searching for innovative ways to offset their increasing expenses. Before they can open their doors, would-be homeowners-turned-hosts have a wide array of legal and financial hurdles to jump.
A critical initial step for people who have a mortgage is to reach out to your lender. Every lender has detailed policy on lodgers and knowing their requirements can save homeowners some heartache and headache. In fact, one example given—Principality Building Society—not only does not allow more than one lodger, they do not even allow them! These restrictions are not uniformly applied across lenders, so it is important that homeowners research in advance to avoid surprises down the road.
Understanding the “Rent a Room” Scheme
The “rent a room” scheme provides an appealing alternative because it allows homeowners to bank extra income. This new program allows them to make up to £7,500 annually. They can do this tax-free by providing shared housing in their main home. The monthly cap works out to around £625, meaning it offers a real income lift to hard-pressed households.
Though homeowners can take advantage of this program, they need to be sure that the room that is being rented out is furnished. This condition is really important to make sure that the tax rules connected to the program are followed.
“Homeowners who rent out (always furnished) rooms to lodgers do so under a licence rather than a tenancy agreement, which sets out the conditions of their stay in your property.” – Matt Hutchinson.
Homeowners need to be aware of what happens if they earn more than the £7,500 limit. In those instances, they would have to pay income tax on anything made over this threshold. Additionally, if they have to split this income with a partner, the tax-free limit is cut in half to £3,750.
Legal Considerations and Requirements
Renting out a room to a lodger comes with a number of legal obligations that home sharers must meet as a homeowner. One key step is making sure to do a “right to rent” check. This helps to ensure that prospective lodgers are lawfully settled and available to stay in the UK. This process is a crucial step in verifying good faith compliance with anti-discrimination immigration laws.
It puts the burden on homeowners to keep their gas appliances inspected annually. They need to get a regular Gas Safe registered engineer in to do this important job. This important safety measure goes a long way to protecting both the homeowner and the lodger from avoidable dangers associated with gas safety.
Homeowners should have a lodger agreement in place that establishes the expectations and details of their lodger’s stay. This compact may cover codes for overnight guests, noise control, shared kitchen and bathroom cleaning duties, and even common room usage. By laying the groundwork for what all parties should expect at the beginning, you can avoid confusion and tension down the line.
“Even those lenders who don’t have an issue with lodgers may have certain caveats, such as a cap on the number of lodgers. Principality will only allow one, while Nationwide and Santander will allow up to two lodgers. Some lenders will forbid lodgers altogether.” – Mark Harris, chief executive of SPF Private Clients.
Navigating Financial Implications
Homeowners thinking about taking in a lodger should think not just about the income they can generate. For example, it could end the council tax discounts homeowners might be eligible for if the council moves a lodger into the property. We recommend homeowners contact their local county/township authorities to understand how these changes may affect their tax exemption status.
When choosing a lodger, it helps for property owners to inquire about candidate’s lifestyle practices and anticipated routines. Questions about routines, work schedule, smoking, pet ownership, frequent guests, and cleaning habits will help you gauge compatibility.
The standard duration of a lodger agreement is one month long but it can be shorter if both agree. This flexibility gives homeowners the opportunity to determine if a lodger really is a good fit for their particular living space.
Additionally, would-be homeowners can look to existing online resources that walk them through the steps of identifying and vetting potential lodgers. These guides can be particularly useful in providing landlords with best practices on promoting rooms for rent and successfully screening potential renters.