Taking in a lodger is an excellent way of earning extra income helping to pay your bills if you have large commitments.
HMRC allow you to earn up to £4250 per year (Just over £350 per month) tax-free through the Rent-a-Room scheme - see Taxation
Many thousands of households throughout the country earn extra income in this way. If you live near a college, university or large employers there's nearly always demand for lodging from students and staff.
With house prices reaching record levels, taking in lodgers may be one strategy which can help first-time buyers get on the property ladder.
The extra income from one or more lodgers is a good way to help finance a house purchase, but make sure you are in an area where there is demand for lodging. Remember, 2 is the maximum number of lodgers you can have in a private house (providing you have the rooms) before your house becomes an HMO (House in Multiple Occupation).
With 3 or more lodgers the HMO regulations bring in expensive extra safety requirements, which must be complied with. Also, if your house is on 3 levels you are likely to become a licensable HMO, which brings in extra rules and regulations and an annual fee.
These days, with more and more demand for single accommodation, students, temporary and transient employees and young people leaving home for the first time, demand from would-be lodgers is not usually a problem.
You have much more control over the situation with a lodger than you do with full tenants. This is because Lodgers occupy your home on licence, and they do not have security of tenure - unlike tenants. Lodgers cannot call the place their own, therefore they have no right to stay on if you give them notice to leave. Your lodger agreement should specify the amount of notice required (usually about 1 month) and this should be given in writing.
To avoid creating full tenancies or becoming entangled with HMO regulations and to qualify for the Rent-a-Room scheme, you must meet certain requirements:
1 The room you let must be in your main residence, where you live most of the year - if you move out the lodger could become a full tenant by default!
2 The lodger must not have exclusive possession of a self-contained part of your property - cooking facilities and bathroom etc., need to be shared with you! You lodger agreement should give you the power to enter and clean the lodger's room, so that exclusive possession of any part of the property is avoided.
3 The room you let must be for the lodger to live in, not to run a business from - you agreement will mention this.
4 If you are a tenant yourself you will need permission from your own landlord before you take a lodger - get it in writing.
5 You will need to inform your insurers - they may want to change the cover slightly, and it's a good idea to ask the lodger to insure their own possessions - your household insurance may not cover the lodger's possessions. Make sure that your insurers have been informed in writing that you are taking in a lodger or lodgers, and that your insurance policy fully covers you for any liability claims. With no-win no-fee litigation now common, a claim against you for an accident could be astronomical.
6 You need to inform your mortgage lender, though it's unlikely they will have any objections.
7 You must not have more than 2 lodgers in a private house, unless you are prepared for the house to become an HMO.
8 You need to make sure your house is safe and meets the current safety laws, particularly regarding annual gas safety checks - see below.
You will not normally need planning permission and a lodger should not affect your council tax banding. However, it could affect the amount charged in several ways depending on whether the landlord is in receipt of either of Council Tax Benefit, Council Tax Discount or Council Tax Exemption.
Whilst council tax is "registered to the property" the liability depends on who is the occupier for the purposes of council tax.
A landlord who lives in the house would be liable and should collect a portion of the liability from the lodger or each lodger.
In the case of tenants: if the landlord lives in a shared building (except purpose build blocks of flats) where there is more than one tenant occupying flats which are individually assessed for council tax, then the tenants MAY be liable directly to the local authority.
A tenant who occupies a house or flat as an exclusive tenancy will be liable to pay the Council Tax direct to the council, and the landlord would only have liability if the house has been empty and ceased to attract a nil charge.
There are exemptions for students and persons under 18, discounts for single occupancy etc. The deciding factor as to whom is liable for CT is laid down in law and the definitive answer should and must come from the local authority for the area.
Common sense tells you that you owe a duty of care to your lodger with regard to health & safety, and this is a common law duty. Your property therefore needs to comply with standard letting safety requirements.
Annual gas safety checks are required, which means any gas boilers or appliances such as cookers need an annual gas check and safety certificate. If you are a landlord letting a property equipped with gas appliances you need to understand and comply with the law relating to gas safety.
You need to have a gas safety check every year. A Gas Safe Registered Engineer must carry out the safety check in your properties in Great Britain and the Isle of Man. As a landlord, you are legally responsible for making sure that a Gas Safe Registered Engineer checks the gas appliances in your rental properties every 12 months and gives you copies of the gas safety certificates.
Any furniture and furnishings you provide for your lodger should meet current safety standards.
The electrical system and appliances should be safe, so although there's no requirements for a an annual electrical safety check, you should have the system checked around every 5 to 10 years. Appliances which the lodger may use should also be checked regularly.
You obviously need to be very careful who you take in as a lodger, as they will in effect become part of the family. We all tend to be too trusting of people we don't know - letting a complete stranger into your home is a risk. If you want to see the worst that can happen watch the film "Pacific Heights".
You need to screen lodgers as you would tenants, by having a formal Lodger Application Form and taking up the same kinds of references and checks you would do with a tenant etc.
Given the risks these days with fraud, debts, identity theft etc, it is most advisable to verify the lodger very thoroughly. You should ALWAYS carry out credit checks and referencing on prospective lodgers, just as you would a tenant - no exceptions, unless you know they are genuine or they come recommended from a reliable source.
Legally you don't need a formal agreement, but it is an extremely good idea to have one, as it can prevent a lot of arguments later.
You should always have a formal agreement - House & Flat Share (Lodgers) - which sets out house rules and notice periods etc. Usually one-month's notice on either side will be considered reasonable and will suffice.
It's a very good idea to have an information pack which also includes a set of house rules which you expect your lodger to observe. The information pack can include local information, shopping, transport, entertainment etc, plus safety information for emergencies - what to do in case of fire, escape routes, door keys, stop taps and isolator switches etc, and instructions about how to operate appliances.
Do not be tempted to take in a lodger without:
If you don't do these things, you could live to regret it!
Good lodgers can become great friends and companions, they can even become free house sitters, child and pet minders. But how do you attract a good lodger?
- Make sure your house is clean, stylish and inviting inside and out and that the facilities you provide are adequate for your lodger's needs including: cooking, washing, drying, entertainment and privacy when required. A double bed with duvet and perhaps hypo allergic pillows and TV in the room, shower and bath on suite is ideal but nearby if not, would be expected these days.
- Try to make contacts through word of mouth and recommendations through local people - put the word out that you are looking for someone rather than an ad in the local shops or papers.
- If this fails try local employers, particularly schools, colleges, universities, local authorities and hospitals - some of these will have accommodation people you can talk to and you might even use their notice boards or Intranets, with permission of course.
- Local shops and papers come last - but remember, you need to be particularly thorough with your screening process if you are dealing with strangers.
Benefits: If you or your lodger are claiming means tested benefits these could be affected by the lodging arrangement. By providing meals and including the cost in the rent the landlord can reduce the effect on their means tested benefits, but this could adversely affect the lodger's benefits. The calculation is complicated. Seek advice from the Council before offering a room to a lodger when you are on benefits.
Banker's Standing Order: Its a very good idea to collect rent through standing order payments. There are a lot of good reasons for this, but the main one here is that it prevents friction when rent is late, or worse, not paid at all.
You can download a free Standing Order Mandate
Letting to a lodger will normally come under the Rent-a-room Scheme unless you opt-out by informing the Inland Revenue. In certain circumstances you may be better off opting out of the scheme, though this is less common.
If you share ownership of your home with others you may be able to share the tax free income or even increase the allowance.
It may also be possible to charge for services such as laundry and meals you provide, and have these incorporated into the tax free scheme. Check with the Inland Revenue.
Don't be tempted to take pity on down and outs or people going through martial break-ups or other sob stories: the best lodgers are people who have their lives together; students and hard working motivated people with a purpose in life.
Discrimination: bear in mind that discrimination laws apply when selecting your lodger as they do when selecting employees. It's so important to have a proper selection procedure, including application, referencing, identity checks, interviews - see our section on tenant screening for guidance here
You need to be tolerant, make some allowances and give your lodger space and freedom - after all it is their home as well. But stick to your rules: if things start to go wrong you need to bring the issues up immediately, don't allow them to build up into huge resentments.
For more information read Rosy Border's book and see Taking in Lodgers - Questions & Answers - taking in lodgers - answers to Frequently Asked Questions
For more information on lodgers visit - Lodger Landlord