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Rent a room for tax-free cash

Rent a room for tax-free cash

If you have rooms to rent or just one spare room, renting them out on a temporary or full-time basis is the first obvious way of making easy money. Renting a room is tax-free too as you can make up to £4,250 a year from letting your room, before you have to pay any tax on it. So if you want to rent a room, find out the pros and cons, the pitfalls and the joys in our guide.

Rooms to rent? Who would be interested?

Your location should give you an idea of the kinds of people who may be interested in renting your room. Are you close to a university or college? You could provide accommodation for students who are living away from home. Or do you live close to an airport? Cabin crew are frequent lodgers as they often move away from home to do their dream job and need somewhere close by to rest their head when they are not travelling. And of course, if you live in a city or within close proximity to train stations and other good transport links, your property is likely to attract interest from young city workers and commuters.

Furnishing

Depending on what your room is currently (or was previously) being used for, you may want to think about furnishing it for ‘rent a room’ use and perhaps re-decorating. You don’t have to go overboard, but if the room is neutral in decor and contains the necessary amenities then it is likely to appeal to a greater amount of potential lodgers. If your spare room is currently unsuitable for lodgers to move into, furnishing it can be easy and cheap. You may even be able to get things for free – but make sure they are in good condition before you buy them. Sites like Gumtree, Snaffleup and Freecycle all have free stuff advertised – you just need to be able to pick the items up. You’re unlikely to be able to furnish the whole room – and if you can, it won’t match! But even if you manage to get a bed, some drawers or a desk, at least this will help towards costs. Take a look at our article on special home improvements without the pricetag. For items that you don’t want or can’t get secondhand, you can pick up simple, co-ordinating furniture relatively cheaply from places like Ikea, Amazon, Furniture Outlet Village and Argos. Many retailers still have sales running so take advantage quickly. Ikea is great for choice – the Kullen set of drawers comes in three different storage sizes, from two drawers (which will double up as a bedside table) to five drawers. Prices start at just £19. Or you can get this three piece storage set, consisting of a wooden wardrobe, chest of draws and bedside table all for just £164.99. That should be your bedroom storage sorted. And you can finish it off with a full length mirror for just £29. So that’s a whole bedroom’s worth of furniture for under £246 – and that’s if you haven’t managed to get something for free. Don’t forget that any expense made by you will eventually get covered by the rent paid by tenants, so you need to bear this in mind when you come to working out how much to charge for the room.

Contents insurance

If you are providing a ready furnished room, you will want the contents protected under the house insurance should anything happen to them through theft or fire, for example. The first thing you need to do to ensure your belongings are covered, is to give an accurate estimation of what they are actually worth. What you don’t want to do is underestimate the value of your belongings just to get lower premiums. If you do this and make a claim, insurers may only pay out a fraction of what your damaged possessions were actually worth – so you’ll lose out in the end. There are ways in which you can lower the cost of your premiums – by installing fire alarms, for example. Find out more ways to cut the price of your home insurance. To compare policies check out our home insurance comparison pages. The valuation of the contents of the room may include both the furniture you have provided with the room and the belongings the tenant is moving in with. In this case, you will need to wait until you have a tenant before you can estimate the value of the room’s contents! You will, however, be able to discuss with your tenant whether they would rather add their belongings onto your existing insurance policy or create one of their own. If their belongings are added to yours, don’t forget to add the cost onto their weekly or monthy rent. If they arrange their own, this may be less problematic for you as the homeowner, as they will be responsible for sourcing the policy, paying for it and ensuring that all their belongings are covered. There is a guide for homeowners on the Association of British Insurers website which outlines what you need to include in your estimation and also what most insurers will actually cover. Make sure you update this list every year when the policy is renewed. The second thing you need to do, is to make sure your insurers are aware of your lodger. Having someone live in your house that you didn’t previously know, and your insurers are not aware of, can invalidate your cover. This is because should you make a claim for theft, your insurers could challenge it with the fact that you have a stranger living with you. This is not true of every home insurance company – but be on the safe side and make them aware of your lodger. When screening potential lodgers, you may want to find out if they have any previous criminal convictions. This is a touchy subject, especially with strangers, but should you invite someone with a conviction into your home as a lodger, your home insurance may well become invalidated.

Advertising your space

This should really be easy enough – and probably won’t cost you much. Firstly, if you live near to a university, college or other institute, ask if you can put some notices around campus. Secondly, use sites like Gumtree, Spareroom, EasyRoommate andLets Direct to advertise for free.  Failing these, you could advertise in your local newspaper or put an ad in your newsagent’s window, although both of these will cost you a small fee.

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References

Unless you manage to rent your room out to a friend or acquaintance, you are ultimately inviting a perfect stranger into your home to live with you. And unless you have no qualms about the type of person you have live with you, you may want to think about asking potential tenants for some references before you give them the keys. Ask for and check at least two references. These will ideally be previous landlords and workplace references. Take the time to call them up instead of sending them an email. You’ll be able to get an idea of their authenticity a lot easier if you actually hear their voice. For previous landlords, you may want to ask some of the following questions:

  • What was their address? (use this to check that the reference is actually who they say they are – they should be able to answer pretty quickly)
  • Did they pay their rent on time?
  • Did you receive any complaints from neighbours?
  • Were you happy with the way they looked after the house?
  • Would you rent to this lodger again?

For workplace references, you may want to ask some of the below questions -

  • When did they start working for you?
  • What is their position?
  • What sort of hours do they work?
  • Are they full or part time?
  • Do they get paid on a weekly or monthly basis?

The answers to these questions will firstly ensure that the potential lodger is telling you the truth and secondly ensure that their rent will be met.

Drafting a contract

It’s important to have a contract in place so that there is a written agreement between the two of you and you can refer to this in the event that anything goes wrong. You will need to state the rent amount per week or month, when it is to be paid (the first or last day of the month is usually easy to stick to), whether it is to be paid in cash or a direct debit and how much notice each side needs to give for the lodger to leave – 30 days is usually enough. It is reasonable to ask for about a month’s rent in advance. This can also act as a deposit in case of damages. We’re not talking broken glasses or smashed plates, but a broken bedstead or difficult stains on the carpet are serious enough to warrant payment. If, when the lodger decides to move out, there are no damages, then the deposit can be given back in full. It is a good idea to lay down some house rules in the contract. If you work shifts or have young children, your lodger can’t expect to be up until the early hours of the morning watching TV loudly or stumbling in from a night out. As silly as it seems, you may want to make it clear that you expect them to tidy up after themselves – it is your house after all. It’s unlikely they’ll have any pets, but its always a good idea to set some rules on this. The same goes for smoking – make it clear about whether they can smoke in their room, the rest of the house (if you smoke yourself) or whether they have to go outside. This is one rule that could be considered a contract breaker – i.e. they smoke in the room and they’re out! Its really not worth having to deal with the fire brigade at 2 in the morning because your lodger fell asleep with a cigarette in their hand. You’ll be very, very lucky if you don’t have any problems at all with your lodger, so put a process in place by which you can arrange to sit down and raise any issues. If things get a bit out of hand, like if they are continuously late with their rent or disrespect your home, you could put a warning system in place – if they get three warnings they’re out! It will also be a good idea to get next of kin details from your lodger, in case anything were to happen and you needed to get in contact with their family or close friends.

How much can you make?

This will vary a lot depending on what sort of room you have and more importantly, where you live. Living within close proximity to large cities, educational institutes and places of work will allow to charge a little more than other places. You can expect a bit more interest in your room though, which might make it harder to make a decision!

You need to think about whether to ask for rent on a weekly or monthly basis. If you ask for the rent on monthly basis, you will end up gaining slightly less in the long run than than if you receive it on a weekly basis.

Under the Rent-a-Room scheme, you can charge up to £81 a week (£354 a month) without paying any tax on it – that’s a total of £4,250 a year. Anything over that, and you’ll have to pay tax. But there are a few things you’ll need to bear in mind when deciding how much to charge:

  • Is the room decorated and furnished to a comfortable standard? E.g. would most people be able to happily occupy the room?
  • Will the room provide the lodger with a comfortable space? E.g. double bed and room to move.
  • Is there space in the bathroom and kitchen for the lodger to keep their own food and belongings?
  • Is the property within close proximity to train stations, motorways etc?

You’ll also need to make sure that the amount you charge in rent covers the additional cost of electricity and gas bills and any other utilities.

Is renting a room for you?

Pros

Most obviously, this is an easy way of making money without actually doing any work. The money you make can ultimately help towards mortgage costs or any other expenditures.

If you screen potential lodgers properly, you’re likely to end up with someone who will fit into your lifestyle and who you will get along with easily. If you live on your own, a lodger may be excellent company and open up a whole new social life and circle of friends.

It is much easier to remove unsuitable lodgers from your property than it is to remove full tenants, as they do not have the security of tenure. Therefore, should it not work out, and you have outlined details in the contract, it is easy to get them to leave.

Cons

If you like your privacy and can’t bear the idea of sharing your bathroom and kitchen with a stranger, this is probably not for you. Similarly, Naked Sundays and cooking in the buff may be compromised. If you have young children and don’t like the idea of having a stranger in the house, then hold out until a distant relative or friend of a friend needs a room.

Lodgers do have a right to occupy the other rooms in the house and also to invite guests over, so if you’re not a people person this might be difficult.

But bear in mind that you could gain a lodger who simply likes to keep themselves to themselves and spends most of their time in their room. Screen potential lodgers properly and you should be ok.

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10 Responses to “Rent a room for tax-free cash”

  1. milly says:

    There’s some great advice here. I’ve just ventured into the new world of letting out my room through a company called Room Paddy. I only do short term lets for holiday makers so far and it’s going really well. Not as intimidating as having someone in long term, but I may give it a go. Thanks for the advice!!

  2. bánh trung thu kinh đô says:

    I believe this is great – so much important info for me. And i’m happy studying your article. But to comment on few general issues, The web site taste is perfect, the articles is actually great : D. Excellent activity, cheers

  3. Jeni says:

    Does any one know of any good websites or ways to attract foreign students to stay in areas other than London?

  4. Mrs Sharpe says:

    Thinking of renting our spare room under the rent-a-room-scheme.

    Do you include bills in rental price? In particular, how do you deal with phone calls/internet usage?

    Can we add them to our internet usage?

    Should we install a separate phone line in the lodger’s room for calls? If they run up a huge bill and can’t pay, who will be liable?

    Thanks.

  5. Mary Smithe says:

    I rent my spare room out to international students and have done so now for 2 years. I am a host family with a company called ‘HFS London’ – they work for universities and schools in London and have sent me quite a lot of students. There are pros and cons to being a host family but overall I have enjoyed it! It can be hard work at times as you are supposed to provide more than just a room to the students. If your main priority is to get as much income from your spare room as possible then probably hosting is not for you – get a lodger in on a longer term contract. I would definitely advise that you look into being a host family (and would recommend the above mentioned company) but make sure you are happy that foreign students tend to be short stays (my students tend to stay around 4 weeks at a time) and they may not provide such a regular second income. If you would prefer a short term from time to time extra income (like me!) and you enjoy meeting people from all over the world (I have have hosted students from Brazil, China, Spain, Russia to name a few nationalities) then definitely give hosting a try.

  6. chandra says:

    I have one bedroom to rent with seperate baths.

  7. mar says:

    I host foreign students in London. It’s a great way to earn extra money . It is also good for the kids to learn another language.
    I use an agency called Hostfanilylondon.com
    They are very helpfull and always on hand for advice . I would reccomend them to anyone thinking of renting out a room.

  8. Barrie says:

    Great article. I’ve just posted a home insurance post too

  9. It’s very important to screen any potential rental person you may have as well. After all they will have almost full access to your home!

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