Increasingly, homeowners are taking in lodgers to help pay their mortgage and other bills, during these challenging financial times.
Aided by the Government’s Rent a Room Scheme, rent from lodgers goes further than many people think, as the income is tax free up to £4,250 per year. Divided by the 12 months in a year, this equates to over £350 per month of extra tax-free income!
To qualify, homeowners are required to make available part only of their home, which must be furnished. That said, a home owner can make available a single room, or a whole floor but it must not be a separate flat, the rent from which would attract income tax in the normal way.
This Scheme is also available to tenants. Subject to the landlord’s prior consent, a tenant can also take in a lodger(s) and obtain the tax-free benefits on the rent.
There is also no qualifying period of time, therefore, with the 2012 Games coming to London, it is thought likely that many Londoners will take advantage of the Scheme.
To apply, home owners who are PAYE tax payers and do not complete a self assessment tax return, need to do nothing, as long as the rent from the lodger(s) is less than £4,250 per year. For those who annually complete a self-assessment tax return, they will need to declare the income on their tax return and claim the allowance.
Under the Scheme, homeowners are not entitled to deduct expenses from the rent received from the lodger.
Accordingly, consideration may need to be given by a homeowner as to whether to ignore the allowance under the Scheme, in favour of other tax benefits. The reason for this is that if a homeowner declares the lodger’s rent as income in the normal way, on his/her tax return, deductions can be made for expenses in order to lower the overall level of taxable income.