Did you know that if you have a spare room in your property, you could make up to £4,250 a year tax-free from letting it out? PrimeLocation takes you through the steps.
To make it easier to take on tenants, the government's Rent-a-Room scheme offers clear tax advantages. Our guide will show you who qualifies for the scheme, how to get the right tenant and what kind of agreements you should make.
Who can let a room in their property?
Anyone who owns a property and uses it as their main residence can have a tenant under the Rent-a-Room scheme.
If you pay rent to live in your home, you can also use the scheme, so long as the terms of your lease allow you to have a tenant.
If you have a mortgage, you should check with your lender and insurer to be sure that it is within their terms and conditions.
If you share a home with a partner and are both letting furnished accommodation in your joint home, you are each entitled to half the allowance without paying tax.
Advantages and disadvantages
The main advantages of the scheme are financial:
- You do not have to declare any income from letting a room (or rooms) up to £4,250 per year.
- This saves you the hassle of adding up bills and expenses, such as accountancy fees, cleaning services or Council Tax, to offset against your income.
- If your income from letting a room is less than £4,250 per year, you may not have to submit a tax return at all. If you don't normally receive a tax return, you wouldn't have to do anything.
The disadvantages of the scheme are also financial:
- You cannot claim any expenses against the letting income you receive.
- If you receive more than £4,250 per year in total (for example through charging for meals or laundry) you will still have to declare the extra amount and pay tax on it, even if the rent is less than £4,250.
- The tax-free bonus may be worth less than the deductions you could claim from expenses.
Would it work for you?
To work out whether the scheme would suit you, calculate your likely income from letting one or more rooms. Then deduct allowable expenses. These are:
- Letting agents' fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountancy fees
- Buildings and contents insurance
- Interest on property loans
- Maintenance and repairs (but not improvements)
- Utility bills
- Rent, ground rent, service charges
- Council Tax
- Services you pay for, such as cleaning
- Direct costs of letting the property, such as phone calls, stationery and advertising
Broadly speaking, if your likely income will be up to £4,250 and your expenses are small, the scheme would probably suit you. If your income will be much above this amount and your expenses are, for example, £2,000 or more, you'd probably be better off declaring the income and paying tax.
Find the right tenant
If you advertise for a tenant, it's worth adding a photograph or even video of the room and the living areas. You'll get far more responses to your advertisement than those with no pictures, and it helps people to know what to expect.
Use your description to attract attention. Here are some plus points:
- Describe the property, such as Victorian terrace, or warehouse conversion
- Say how close transport facilities are and what kind
- Mention if you have broadband or cable TV connections
- Describe local shopping, dining and leisure facilities such as parks
- Outline the kind of person you're hoping will respond, such as professional, or student
When you interview prospective tenants, ask them about their daily schedules, to be sure that they match with yours, or at least don't conflict. Make sure that they can afford the rent.
Make your property tenant-friendly
There are several things that the law states you have to do, if you have paying tenants in your home. You should make sure:
- Your gas appliances are in good order and that gas boilers are checked each year by a CORGI-registered engineer
- Electrical appliances and the electrical system are safe to use
- Your home complies with fire regulations.
In addition, keeping the property clean will help to prevent arguments:
- Consider hiring a cleaner once or twice a week, so that nobody ends up feeling aggrieved that they are doing more cleaning than others
- Mend or replace any broken items promptly, especially in the tenant's room.
If you are (or aim to be) a live-in landlord, make sure you treat tenants with respect and courtesy:
- Don't go into their rooms without asking permission
- Be tolerant of them having occasional guests
- Don't keep them awake with loud music
- Respond helpfully to reasonable requests from them
It's important that you and your tenant understand in advance what you expect from each other. And if a tenant requests a written statement of the main terms of the tenancy agreement, then you are legally obliged to provide one.
Clauses in an agreement could include:
- The tenant will replace items or pay for any damage they cause
- The tenant will pay the agreed rent promptly each month (or each week) in addition to an initial deposit
- The tenant will give a set period of notice when vacating the property, typically one month
- The landlord will also give an agreed period of notice to vacate the property
- Guide to letting a property
- Guide to being a landlord
- Tenant and landlord rights
- How to deal with problem tenants
- How to buy to let
Some information contained herein may have changed since it was first published. PrimeLocation strongly advises you to seek current legal and/or financial advice from a qualified professional.