Taking in a Lodger
If you’re considering taking a lodger there are some important things to think about first. Most of it’s common sense, but it’s a good idea plan carefully and get things right.
- Taking in Lodgers is a good way to earn extra income, sometimes tax free
- Taking in lodgers is an excellent way to help first time buyers afford to buy a property
- There is plenty of demand for lodging in most areas – see below about how you can attract lodgers
- Lodgers can provide you with extra security – if you are away, someone is looking after the property, and lodgers can become good companions for people who live alone
- There are no statutory rules governing lodgers, unlike tenancies, so you make your own rules in the form of a contract between you and your lodger. The lodger has a “license to occupy”, not a full tenancy, so it is much easier to remove the lodger if he or she proves unsuitable.
But, there are some important provisos:
- You can have up to two lodgers before you come under the strict HMO regulations, and you must in any case meet the safety standards expected of other landlords, particularly the requirement for annual gas checks
- You must inform the tax authorities (HMRC) if you earn rental income and you must complete a self assessment tax return and pay tax if you earn more that the Rent-a-Room Scheme tax threshold
- You need to be cautious about letting strangers into your home – be disciplined in the way you screen your lodgers – see below
- It’s a good idea to have a written agreement, so that you both know where you stand: rent, deposit, notices required, payment method, payment dates, house rules.
- Collect rent by standing order if you can – this saves causing friction between you and your lodger if rent payments are late
- There’s got to be a bit of give and take because sharing a house can cause friction if both parties are not prepared to respect the other’s space.
Earning Income and Paying Tax
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 £7500 per year (£625 per month) tax-free through the Rent-a-Room scheme.
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, staff and workers.
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 two 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 again and an annual fee.
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.
Notice to Quit
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 14 days to 1 month) and this should be required in writing.
What you need to do before you take a lodger
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:
- 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!
- 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! Your lodger agreement should spell this out clearly and give you the power to enter and clean the lodger’s room, so that exclusive possession of any part of the property is avoided
- The room you let must be for the lodger to live in, not to run a business from – your agreement should mention this
- If you are a tenant yourself you will need permission from your own landlord before you take a lodger – get it in writing
- You will need to inform your insurers – they may want to change the cover slightly. 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, up to £5 million. With no-win no-fee litigation now common, a claim against you for an accident could be astronomical
- You need to inform your mortgage lender, though it’s unlikely they will have any objections
- You must not have more than 2 lodgers in a private house, unless you are prepared for the house to become an HMO
- You need to make sure your house is safe and meets the current safety laws, particularly regarding annual gas safety checks – see below.
Lodgers and Council Tax – who is liable for the Council Tax?
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 you 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 tenant does not occupy or the house has been empty and ceases to attract a nil charge.
There are exemptions for students and persons under 18, discounts for single occupancy etc. The deciding factor as to who is liable for CT is laid down in law and the definitive answer should and must come from the local authority for the area.
Health and Safety
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 all current letting safety requirements.
Annual gas safety checks are required, which means any gas boilers, flues, 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 to lodgers or tenants 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 and your tenant a copy of the gas safety certificate.
Any furniture and furnishings you provide for your lodger should meet current safety standards. See: http://www.berr.gov.uk/files/file24685.pdf
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. See A Landlord’s Guide to Electrical Safety
Screening your Lodgers
You 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 credit checks you would do with a tenant etc. See: www.TenantVERIFY.co.uk
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.
The formal Lodger Agreement
Legally you don’t need a formal agreement, but it is a very 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 14 days to one-month’s notice on either side will be considered reasonable and will suffice.
Home owners get confused about agreements and even use an Assured Shorthold Tenancy (AST) agreement for lodgers. Whilst this is not entirely suitable, and a lodger is not a tenant, this is still an agreement, no matter what it says at the head. In lettings, it’s not what the agreement is called that determines the type of tenancy or letting, it’s the situation that counts.
It’s a 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, location of stop taps and isolator switches etc, and instructions about how to operate appliances, alarms.
Do not be tempted to take in a lodger without:
1. Informing you mortgage and insurance providers.
2. Informing you landlord if you are a leaseholder or tenant (check your lease or tenancy agreement).
3. Informing your local authority if you are on means tested benefits – the extra income could affect your benefits.
4. Making sure your facilities are right to attract decent lodgers.
5. Don’t take more than 2 lodgers unless you are prepared for HMO regulations and licensing.
6. A Lodger Agreement: For a Room in a Furnished House or Flat with a Resident Owner
7. Make sure the lodger agreement gives you access to the lodger’s room – positively no exclusive possession of any part of the property.
8. A set of house rules – smoking, pets, visitors etc.
9. A completed Lodger Application Form
10. Careful screening/verifying including identity checks
11. Setting up a Banker’s Standing Order for rent payments.
12. Telling your lodger to insure his/her possessions and that if they have their own TV in their room, it will need a license.
13. Setting up a Banker’s Standing Order for rent payments.
14. Telling your lodger to insure his/her possessions and that if they have their own TV in their room, it will need a license.
15. Taking one month’s rent in advance on entry and a deposit if you decide to do so – usually about one month’s rent again.
16. Informing the Inland Revenue of your extra income in your tax return – you are allowed to earn a basic amount tax free under the Rent a Room Scheme.
17. Arranging for annual gas checks, plus electrical system checks when needed.
If you don’t do these things, you could live to regret it!
Attracting and Advertising for Lodgers
Good lodgers can become great friends and companions; they can even become free house sitters, or 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
- 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.
Lodgers and Claiming Benefits
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 your local authority before offering a room to a lodger when you are on benefits.
Lodgers and Standing Order Rent Payments
Banker’s Standing Order: It’s a 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 here: https://www.landlordzone.co.uk/agreements.htm
Letting to a lodger will normally come under the Rent-a-room Scheme in England and Wales, Scotland and Northern Ireland (check with your local tax office) unless you opt-out by informing the HMRC. 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 that you provide, and have these incorporated into the tax free scheme. Check with HMRC.
Don’t be tempted to take pity on down and outs or people going through martial break-ups or other sob stories: with exceptions of course, but 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 tenants or employees. It’s so important to have a proper selection procedure, including application form, 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 these links:
- Lodger Application Form
- Landlord’s Guide to Electrical Safety
- Tenant Checks and Referencing – TenantVERIFY
- HMRC – Renting a Room in Your Home
- Standing Order Mandate
- HMRC – Tax on Rental Income
- Books on Renting to Lodgers
By Tom Entwistle,
If you have any questions about any of the issues here, post you question to the LandlordZONE® Forums – these are the busiest Rental Property Forums in the UK – you will have an answer in no time.
©LandlordZONE All Rights Reserved – never rely totally on these general guidelines which apply primarily to England and Wales. They are not definitive statements of the law. Before taking action or not, always do your own research and/or seek professional advice with the full facts of your case and all documents to hand.