Why renting your spare room could be a nice little earner

http://www.theguardian.com/money/2015/jul/13/rent-out-your-spare-room

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Britain’s army of Airbnb landlords has been handed a cash bonus by the Treasury following an announcement in last week’s budget that means most of them will no longer pay tax on their rental income.

At the moment, anyone who rents out a room to a lodger where the rental income exceeds £4,250 a year must pay tax on the amount above this. But last week the chancellor announced that, from April 2016, this tax-free allowance will increase to £7,500, the first time the threshold has moved since 1997.

The move will mean the majority of lodger landlords will avoid paying tax altogether. Lodger landlords can earn, on average, £8,335 a year in London, and £6,071 across the rest of the UK, according to website Spareroom.

“The change has potentially huge implications for the scarce supply of affordable rented accommodation,” says Matt Hutchinson, director of Spareroom. “In the midst of a housing crisis, and with building levels behind all targets, it’s vital we make better use of existing stock.” So should you join the legion of lodger landlords, and if so what do you need to know?

How to go about it

​There’s a spare room rental boom, and it’s not just homeowners who can cash in. It’s now easier for tenants to benefit too, following an announcement in the budget that landlords can no longer prevent tenants from subletting rooms on a short-term basis.

The trend for letting spare rooms is growing by 23% a year, Spareroom reports. With lodger incomes as much as £695 a month in London and £506 in the rest of the UK, it’s easy to see why.​

Websites such as Easyroommate, Gumtree and Hosts International make it easy to fill your spare room on a long-term basis, while Airbnb and Wimdu are set up to match guests to rooms on a B&B or more ad hoc basis.

While these sites help you publicise your room and give guidance on safety, tax and insurance, it’s down to you to make sure you don’t break any rules.

Tax and benefits

Under the rent a room scheme you can now make up to £7,500 a year without paying tax by renting out a furnished room in your home. If your rental income goes over that amount you’ll have to fill in a tax return. And there’s a fine line between taking in occasional B&B guests and running a business, so speak to an accountant if ​you’re unclear about the tax rules and are regularly taking in paying guests.

Taking in a lodger could affect your council tax bill if you get the single-person discount. You’ll still get your discount if your lodger is a student or you have a Monday to Friday lodger who pays council tax somewhere else.

The first £20 a week of rental income will not affect any housing benefit you claim, and universal credit isn’t affected at all by lodger income.

Insurance

Your home insurer will need to know if you take in a lodger or occasional B&B guests. Don’t wait until your policy is up for renewal; it’s unlikely to have much of an affect on your premium, but if you need to make a claim your insurance company can turn it down if you haven’t told them about your guests.

“It’s hard to predict how lodgers are going to use your home,” says Simon Warsop, chief underwriting officer for home insurance at Aviva. “They could be prone to spilling stuff on your carpets or be heavy handed with your best tea cups.

“When we work out premiums we look at how many people live in a home and how it’s used, so it’s important that we have up-to-date information ​so we can assess the risks.”

Another thing it is important to check is whether your potential lodger has any unspent criminal convictions. Take on a lodger with these, and any claim you make on your insurance could be turned down.

Motoring convictions – speeding, parking fines and so on – are not relevant to home insurance and so do not usually have to be declared to insurers.

Mortgages

Contacting your mortgage lender may not be your first thought when you advertise your room to rent, but it’s a wise precaution. “Mainstream mortgages are for borrowers’ use of the property,” explains David Hollingworth, associate director of London & Country Mortgages. “But your lender is unlikely to be unreasonable as long as you live in the property and share the accommodation with your lodger.”

The lender will want to make sure that the lodger won’t have any rights if the property is repossessed, so you may need to have a formal letting arrangement in place. And your lodgers might need to sign a consent form to say that they are aware that the home is mortgaged.

“The idea of short-term B&B is a bit of a grey area,” Hollingworth says. “A mortgage consent form would be impractical in this situation, so I would advise telling your lender to make sure you don’t overstep the mark. If the lender feels that you are coming close to using the property for commercial purposes, or that you’re in breach of the mortgage terms and conditions, then you might have to pay higher interest or switch your mortgage deal.”

Empty nest?

Helen Hickman has been taking lodgers into her farmhouse near Milton Keynes, through Spareroom, for more than three years. She takes two lodgers at a time who tend to stay for at least a year.

“We live in a six-bedroom farmhouse and would be rattling around if we didn’t have lodgers. Both of our kids went off to university at the same time and I suffered from empty-nest syndrome, which is why we did it.” The income also helped to pay for university fees.

“We run this as a business and I’ve learned from experience to be tough. So we take a deposit and our lodgers sign an inventory.” Helen has also toughened up about insisting that the lodgers are clean and tidy. “We had a mouse problem due to one girl leaving food and dirty plates in her room.”

Helen plans to continue renting out rooms. “We’ve met some great people along the way and have stayed in touch with pretty well everyone who has lodged here.”