Fortunately, the taxation issues that surround the issue of renting a room out in your own home are not too taxing, so this is a fairly short article. However, it rarely pays to be blind to the law, and that’s certainly the case as far as taxation of rental income is concerned…

As was mentioned in the first part of this series, under the government’s rent-a-room scheme, rental income from a lodger is tax-free up to £4,250 each year – equivalent to £81 each week. For a higher rate taxpayer, this equates to almost £8,000 extra on your gross salary.

However, to avoid full tenancies 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., are usually shared with you!
• The room you let must be for the lodger to live in, not to run a business from.
• You must not have opted out of the rent-a-room scheme. Normally it is not financially sensible to do so, but there are instances where this is the best option.

Whilst an annual income of £4,250 is more that you will be likely to generate for a room in most parts of the country, it is perfectly possible that the room you are letting is worth more than the allowable £81 a week. There’s nothing stopping you charging more, but be aware that you tax liability does change if you pass this point.

If you receive more than the £4,250 limit in any tax year, you will have to declare the income or profits when you come to fill in your self-assessment returns.

The simplest approach is to declare the income that you receive over the £4,250 annual limit, which results on it being taxed at your highest level. However, it is also possible to pay tax on your total profits after expenses. This means that you can offset the cost of gas, electricity, water bills, insurance premiums for buildings and contents, maintenance, agent’s fees, necessary repairs and fair wear and tear.

Which of the methods you choose is entirely up to you, and you are permitted to switch between them, though you must tell the Inland Revenue what you are doing by the January of the following tax year.

If your rental income from the room is less than the threshold level, you do not need to declare the money on your self-assessment form. You can even charge extra for certain services, such as doing the laundry, providing meals, or cleaning and that money is covered too.

For Inland Revenue details of the Rent-a-Room scheme ask for leaflet IR87 and IR150.
www.inlandrevenue.gov.uk./leaflets/c5.htm

The other sort of tax that can sometimes be affected by having a lodger living with you is your council tax. Most of the time having a lodger will not affect your council tax banding.

The general exceptions are where the landlord does not normally pay the full amount of council tax. This can because of Council Tax Benefit, Council Tax Discount or Council Tax Exemption. For instance, if you live on your own, you will pay a reduced bill which is normally about 75 per cent of the total. But when someone else moves in, you are now liable for the full amount.

But even here, there are exceptions. If that person comes under the heading of what is termed a ‘liability’ category, your status in this area remains exactly the same. An example of such a person is a student, but many others can be similarly labelled, and it’s a good idea again to discuss this with your local council before embarking on this route. There are leaflets available covering all of these points.

Next week: Choosing a lodger