MGM Advantage

Does it make sense to rent part of your home?

If you’re reluctant to sell your home, but keen to generate an income from it (without giving up any of your equity), this could be the answer for you.

A tax free income

The rental income you receive may be tax free. You see, if you’re renting a furnished room in your main residence, then you can take advantage of the Rent a Room scheme. This gives you a tax free income of up to £4,250 per year. That’s a monthly rent of over £350 (these figures apply as at March 2012).

As you might expect, there are a few conditions to be met before you can qualify:

• You have to provide furnished accommodation in your own home.
• You don’t have to be a home owner, you can even qualify if you rent your home (so long as you have permission to sub let)
• The room must be part of your home not a separate building – and you must be living there at the time the room is being let.
• The room must be let for residential purposes only.
• You can charge more than £350 per month, but you need to declare the extra income in the normal way.

If the rental income you receive is more than £350, you will have to pay tax on the extra. Alternatively, if the rent is over the tax free amount you can choose to be taxed normally. In other words, as income. On the face of it, why would you opt to be taxed normally when you can claim the first £4,250 tax free?

Well, if you choose the Rent a Room scheme you can’t claim for any expenses. So, for example, if you spent £7,000 renovating the room you let out and charge £6,000 in rent, you would owe nothing in tax (as you would have made a loss).

Beware of the pitfalls  

Renting a room shouldn’t be taken lightly; there are a number of issues to consider. For example:

• It is likely that your insurance premiums will be increased for both contents and building cover.
• If you have a mortgage you must tell your mortgage company.
• You are responsible for any major repairs and for Health and Safety matters.
• Remember you are sharing your home with a stranger: Make sure you interview each applicant and ask for references (plus a minimum of one month’s rent in advance to protect you against any unpaid rent or damage to your property).
• Make it clear upfront who is responsible for what:
  • How much the rent is? When it is due? When it can be reviewed?
  • Who pays for what? Household bills, Council Tax etc
  • What facilities the lodger can use?
  • Notice periods?

Taking in a lodger can be a rewarding experience, and help with the finances, but you must make sure you know what you’re doing.

For more information contact the National Landlords Association website.