Personal Finance

Surge in renting to lodgers as bills rise: everything you need to know

HOMEOWNERS are increasingly looking at renting their spare bedrooms to lodgers to offset the cost of living crisis, but what are the tax, mortgage, insurance and benefits implications of renting to a lodger? And what rights do lodgers have?

Britons are leaning on the rental market to subsidise their incomes as prices rise, with 91% of landlords who previously rented an extra bedroom to lodgers now considering re-opening their homes, according to a survey of more than 4,000 people by SpareRoom.

The flatshare website’s study also found 61% of homeowners with lodgers were considering increasing their rent to cope with increasing bills.

It may look like an opportune time for homeowners to take in a lodger—with more than 28 prospective tenants for every available property according to estimates earlier this year—but there are some laws and regulations to follow before welcoming in a stranger.

What is a lodger?

A lodger is someone who pays a homeowner to live with them in their home. They share living space such as the kitchen or bathroom, and the homeowner is allowed into the lodger's room and any other space they have access to without permission. This is unlike other rental agreements which would require notice and permission to enter a tenant's property.

Will taking in a lodger affect my mortgage or council tax bills?

A mortgage holder usually will need permission from their lender to rent out a room to a lodger.

A landlord is responsible for paying the council tax of a property with a lodger. They can account for some of this cost in the rent they charge should they wish to.

If they have a single person discount (25%) or are classed as ‘disregarded’, they will need to tell the council they are taking in a lodger.

However if a person living alone takes in lodgers who are all disregarded they can still keep the discount.

What tax do I pay on lodger income? Will having a lodger affect my benefits?

You may not necessarily have to pay income tax on rent collected from a lodger. The Rent a Room Scheme is a way of earning up to £7,500 a year tax free.

Resident landlords—whether they own their home or not—are eligible for the scheme, as are those who run bed and breakfasts and guest houses.

The rooms let out must be furnished, with shared living space. Homes converted into separate flats are blocked from the scheme. Under the Rent a Room Scheme, resident landlords can let out as much of their home as they wish.

The tax exemption is automatic but any income over £7,500 must be declared on a tax return.

Landlords not on the Rent a Room Scheme need to pay income tax on rent minus expenses.

For those receiving Housing Benefit, part of the money charged will be exempt, but anything over £20 will see a deduction. However those targeted by the ‘bedroom tax’ will not be penalised for having a spare room as it is no longer spare. The rules differ again for those on Universal Credit. Citizens Advice has some useful information for benefits claimants renting to a lodger.

What can I charge a lodger for?

As well as rent, a resident landlord can charge the lodger for a percentage of the council tax, utility bills, and even cleaning and food if provided. With energy bills soaring, this could be a way for landlords to cover their rising bills. But beware—the amount charged for energy can only be up to the amount paid plus VAT otherwise this is against the law and the landlord can face civil proceedings by Ofgem.

What is a lodger agreement?

A lodger agreement sets out the terms in which a lodger is allowed to stay in the property. Although there are fewer regulations when renting a room to a lodger compared to a tenant letting a whole property, a lodger agreement is a wise document to draw up to protect the landlord and tenant, and go back to if a disagreement comes up.

It should include names of the landlord and lodger, rent payable and when this is due, deposit amount, how long the tenancy will last (either a fixed term or just a start date with a rolling monthly/weekly contract), plus any notice period for leaving.

The agreement could include a rent review clause explaining when and how rent could be increased.

It should also include any conditions to living in the property. For example someone will enter the room once a week to clean, etc. A resident landlord doesn't need permission to enter a lodger's room. It should explain it is the landlord's responsibility to carry out repairs but that damage caused by the lodger will have to be paid or repaired by the lodger.

When signing the agreement it's also worth including an inventory of items the landlord owns which are in the lodger's room. If both parties sign this it helps prevent disputes when it comes to deposits or other issues.

Do I need insurance to take in a lodger?

It's prudent to tell your home insurance provider you are letting to a lodger to ensure your contents are still covered. They may increase your premium and could potentially add exclusions such as theft without obvious forced entry, but failing to inform them may invalidate your policy.

There are specialist lodger insurance policies on the market which cover things like landlord liability if the lodger is injured in the home, but your home insurance provider may be able to give you protection you feel comfortable with. For more information on landlord insurance click here.

Only your contents are covered in your home insurance. A lodger would need to take out their own contents insurance to cover their belongings.

What rights do lodgers have?

Resident landlords need to make sure the property is safe and in good repair. Furniture must comply with fire regulations, plus gas and electrical appliances must be safety tested every year.

The other rights a lodger has depends on the type of tenancy agreement the landlord has. The lodger will most probably be classed as an ‘excluded occupier’ but can be an ‘occupier with basic protection’.

An excluded occupier means they live in the homeowner's property and share a kitchen, bathroom or living room with the landlord or a member of the landlord's family. The homeowner only needs to give them 'reasonable notice' to end the letting, rather than get a court notice to evict them. Reasonable notice is the length of the rental payment period eg. a month, or it can be at the end of a fixed term, without notice.

However, a lodger with basic protection—classified because they live in the homeowner's property and don't share any living space with the landlord or their family—have a few more rights and a landlord would need a court order to evict them if they refuse to leave.

A landlord must give notice to quit which is at least one month's notice if rent is paid monthly, or four weeks if rent is paid weekly.

In both cases, landlords can take deposits but, unlike private rentals which the landlord does not live in, they don't need to hold it in a deposit protection scheme unless it says so in the contract/agreement signed by both parties. A landlord is able to deduct money from the deposit if rent hasn't been paid or reasonable damage has been made in the property. But tenants can take the landlord to court if a deposit has been withheld unreasonably.

Erin Yurday

Erin Yurday is the Founder and Editor of NimbleFins. Prior to NimbleFins, she worked as an investment professional and as the finance expert in Stanford University's Graduate School of Business case writing team. Read more on LinkedIn.


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