Tens of thousands of UK residents rent out their spare room every year. Working as an additional income, renting your spare room to a lodger or tenant is known as becoming a resident landlord.
Being a resident landlord means you have certain rights and responsibilities that you have to upkeep:
- You are responsible for keeping the property safe and in good repair
- A tenant or lodger does not have the right to challenge agreed rent
- You can give less notice to end a letting than if you rented out your property as a whole
- You may be able to earn £7,500 a year tax-free under the rent a room scheme.
Tips for renting out your room
If you are considering renting out a room to a potential tenant or lodger, there are a few steps that you should follow. This ensures becoming a resident landlord is the right option for you and that everyone involved is safe and on the same page.
You firstly need to advertise your room on noticeboards, amongst friends and family or, with a website that advertises to lodgers. During the initial steps, you should consider a rent that you are happy to advertise whilst considering which bills are or, are not considered. It is important to carry out background checks on your tenants, you can ask for a written reference from a previous landlord or their employer for example.
Deciding how long to let your room out for and creating an inventory are great ways of ensuring you are covered. An inventory should cover everything in the room as well as mentioning any existing damage e.g marks on walls.
Informing your mortgage lender is also another important step to not forget when renting out a room. It is unlikely to cause any issues however, if you do not inform them, you could be in breach of your mortgage terms. This could be slightly different for leaseholders. It is best to check that you are able to accept a lodger however, this information should be available in your lease agreement.
As well as letting your mortgage provider know about your new tenant, you should also inform your home insurance provider as your cover could be affected. Just like with your mortgage company, if you do not tell your insurance provider, you may be in breach of your policy, making it invalid. Requesting a deposit and checking council tax are other pointers to not forget. If you live on your own, you are entitled to a 25% council tax deduction, if you take in a tenant however, this will change.
What is the Rent A Room Scheme?
The Rent A Room Scheme allows you to earn up to £7,500 a year, tax-free from letting out a furnished accommodation in your home. This however, is halved if you share the home with someone else. You are able to let out as much of your home as you wish.
If you earn less than £7,500 a year, the tax exemption is automatic and you do not need to do anything. If you earn more than this, you must complete a tax return. From here, you can opt into the scheme and claim your tax-free allowance. Alternatively, you can choose to not opt into the scheme and instead, record your income and expenses on the property pages of your tax return.
You can opt into the scheme any time if you:
- You are a resident landlord, whether you own your home or not
- You run a bed and breakfast or guest house
You cannot use the Rent A Room scheme if the accommodation is:
- Not furnished
- Not part of your main home when you let it out
- Used as an office or for any business. The scheme can be used if your lodger works in your home in the evening or at weekends or, is a student who is provided with study facilities
- In your UK home and is let out while you live abroad
Paying tax when you rent out a room
If you are using the Rent A Room scheme and your gross receipts from letting are lower than £7,500 or (3,750), you do not have to pay tax on your profit. Your gross receipts include:
- Rental income before expenses
- Any amounts your receive for meals and goods and services (cleaning and laundry for example)
- Any ‘balancing charges’
You mostly count your gross receipts for a tax year which is from the 6th of April one year, to the 5th of April the next.
The annual Rent A Room scheme limit for tax is £7,500,the reduction to £3,750 applies if someone else receives income from letting accommodation in the same property such as a joint owner.
If it is the end of the tax year and your gross receipts are lower than £7,500 or £3,750, you are automatically exempt from tax on this income. If however, your gross receipts are higher, you can choose how you want to work our your tax.
You can pay tax on your actual profit, your total receipts less any expenses and capital allowances.
You can pay tax on your gross receipts over the Rent A Room limit that is; your gross receipts minus £7,500 or £3,750. You cannot deduct any expenses or capital allowances if your choose this method.
HMRC will automatically use method one to work out your tax. If you want to pay it back using method two, you need to tell HMRC within the time limit. You will continue to pay tax on your gross receipts that are over the limit until you tell them that you want to change the way you pay tax back.
If you have any questions about renting out a room in your home or advice about managing any accounts, please don’t hesitate to get in touch with the Cooper Accounting team, we would be more than happy to help.