Latest news with #lodger
Irish Times
6 days ago
- Business
- Irish Times
Will I face a capital gains tax bill on sale of my home because I have a lodger?
I live alone in a house that I own. However, for the past few years I have taken in a lodger to help pay the bills . It is not an issue right now but I am wondering what this will mean if I sell the house in the future. I do not think they come under the rent-a-room relief as we have agreed to divide the house so that each of us has our own area to liv e in without intrusion. But it is still my only home. I am wondering if this is a situation you have come across before and if you can advise what, if any, tax liability I might have if I sell. Mr B K READ MORE I'm not sure why but this is a situation that has never crossed my desk until now. That's odd because it is not that unusual a position these days. People who are alone because of bereavement or relationship break-up can find themselves with a home that is often too big for them and bills that can threaten to overwhelm. Taking in students or a lodger to help meet those costs – or even for a bit of company – is one obvious answer, quite apart from helping to address our current housing crisis . The basic rule is that you do not pay capital gains tax on your principal private residence – your only or family home – as long as it sits on a site of less than one acre and you are selling it for occupation and not for its development potential. But, if it is a rental property, it is liable to capital gains. The obvious answer here is rent-a-room relief. Despite its name, it does not restrict you to a single room. [ Is a room rented under rent-a-room scheme restricted by RPZ rules? Opens in new window ] The key criteria are: that the property is your home and you reside there at the same time as your tenant; that the room or rooms are in or attached to the home; the person is staying for more than 29 days; and that the total income you receive for rent and any associated services (utility bills, laundry etc) comes to no more than €14,000 in a calendar year. A cent more than €14,000 and you no longer meet the conditions for the relief and the whole lot becomes taxable as income. In capital gains terms, that €14,000 threshold is the limit between principal private residence and rental property. So, regardless of how you have organised your living arrangements, if the annual rental income is below €14,000, you should be OK for the rent-a-room relief and I cannot see Revenue challenging that. If the figure is above, all is not lost. If you sell, Revenue will want to look at two things. First, for what proportion of your ownership did you rent out some of the space? Second, how much of the space did you rent out? [ Can I lose access to capital gains tax relief if I sell a section 23 property at a loss? Opens in new window ] In fairness, this would apply also if you were running a business out of part of the property. You've given me no figures here so I'll just give you a very basic example and you can adjust it to meet your circumstances. Say, you own the home for 30 years and you take in a tenant other than under rent-a-room relief for the last 11 of those years. The final year of ownership is regarded as owner-occupied regardless of the actual circumstances, so you will be considered to have rented the property for 10 of the 30 years, or one-third of your period of ownership. There is a second element. How much of the home did they exclusively occupy, and that 'exclusively' is important. If you shared the kitchen or a dining area, a sittingroom and/or a bathroom, they don't count. [ Q&A: I have owned a home for 33 years but rented it out for some time. What is the likely capital gains tax? Opens in new window ] Let's just assume the house was split 50/50: you lived downstairs and they lived upstairs with their own makeshift kitchen etc. So, for one-third of your period of ownership, one-half of the property was rented and the balance was occupied by you as owner-occupier. In those circumstances, Revenue would assess capital gains on one-sixth of the financial gain made on the sale of the property as one half of the home has been rented out for one-third of the period of ownership. As a formula, that is 10/30 x 50 per cent. You know how much of the home they exclusively occupy and for how long, so you can simply replace those figures with your own. The same basic principle applies if you have more than one tenant. If the house was bought before the end of 2002 – as it is in our example – you would also be able to apply an indexation factor – available here – to the original purchase price to allow for inflation. You can also takes any costs incurred in buying and selling the house, such as legal and estate agent fees, from any capital gain before assessing tax liability. Of course, if you hold on to the house until you die, any capital gains tax liability will die with you. Remember, the first €1,270 of any capital gain arising is exempt from tax. It's not a huge amount in the context of a house sale but every little counts. Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to , with a contact phone number. This column is a reader service and is not intended to replace professional advice
Yahoo
21-07-2025
- Business
- Yahoo
How to build passive income
It's the time of year when passive income becomes a buzzword. People look out of the window from their desk and think: "Wouldn't it be nice to spend the day out there in the sun — and still earn money". In the UK, we often associate passive income with property, and imagine an easy life as a rich landlord. In reality, this can be harder work than you might think and there are several things to consider before you jump in. There are a number of ways that people tend to get property working for them. At the most accessible end of the spectrum, they might let their property out while they're away on holiday, or rent a room in their home to a lodger. Those with more assets might choose to buy a rental property for a regular income that way. Whatever option you choose, don't overlook a potential tax bill. You have an annual allowance of £1,000 you can make from property. Plus, if you rent out a furnished room to a lodger in your home, the rent-a-room scheme means you can make £7,500 from it without paying tax. However, after that, you will need to consider income tax on any rent, and will probably have to complete a self-assessment tax return. If you buy a property specifically to make money from it, you also have to factor in extra stamp duty when you buy and potential capital gains tax when you sell. Read more: Do you trust your partner enough to give them money for tax purposes? It's not just the tax return you have to worry about. Before you start letting out your own home, you need to consider home insurance and check your mortgage documents to see if this sort of thing is allowed. For long-term lets, getting hold of tenants and vetting them requires some legwork — unless you're prepared to pay a company to manage this for you. You'll also need to keep on top of rental income and be prepared to chase if you don't get the payments you're expecting. If the tenants refuse to pay, then you're could be in a whole new realm of paperwork dealing with the courts. There's also the management of the let to consider too — for short-term renters there may be questions ahead of every visit, and issues when guests arrive, plus cleaning and maintenance before and after the visit — and possibly during. For long-term lets there will be maintenance to do between tenancies, plus ongoing repairs and emergencies. You'll need to choose between being on call day and night, or paying a company to do this for you. The cost of these things will eat into any rent you make. You also need to factor in any periods when the property isn't let — and any time when the tenants don't pay. Plenty of people rent out property without any major issues, but if you're considering it, it's vital to go in with your eyes open to the work and costs involved. An alternative way to build passive income An alternative way to build passive income, without this level of hassle, is to invest. You can hold a portfolio of investments that are designed to produce an income, and aside from revisiting the portfolio every few months, there's no extra work to do. If you invest through stocks and shares ISAs, you can do so without having to worry about tax or doing a tax return. There is some work needed at the outset, to get to grips with investing, and building a portfolio that's right for you. You can pay a financial adviser to guide you with this, or you can read articles and guides and build the knowledge yourself. Often the easiest approach is to get started with regular small sums drip fed into a diverse fund, and build your portfolio and your knowledge as you go along. Plus, at this time of year, it's the sort of thing you can do while sitting on a sun more: How to start investing with an employee share scheme How your health can affect your pension How to save money on your council tax billError in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Telegraph
26-06-2025
- Business
- Telegraph
How to earn £7,500 tax-free from your home
Have you ever rented out a room in your home to a lodger? We'd like to hear from you. Email money@ If you have a spare bedroom in your home, the Government's rent-a-room scheme could be an extremely tax-efficient way to boost your income. The scheme allows you to earn up to £7,500 tax-free per year, completely legally, and regardless of your personal income tax bracket, simply by taking a lodger into your home. It's a welcome boon to those seeking a supplementary source of income and who have a spare bedroom gathering cobwebs. Designed to encourage homeowners to make better use of underutilised space, the scheme has the ability to turn your spare bedroom into a profitable financial asset, provided it is furnished and within your main residence. But while this may sound straightforward, making use of the scheme and letting someone into your home can be anything but. For instance, who is eligible for the scheme, do you need to inform HMRC and what happens if you exceed the £7,500 limit? In this comprehensive guide, we break down everything you need to know about the rent-a-room scheme. We will cover the following: What is the rent-a-room scheme? How rent-a-room tax relief works Lodgers vs tenants How to find the right lodger in six simple steps Conclusion and final thoughts Rent-a-room scheme FAQs Quick takeaways You can earn up to £7,500 tax-free by renting out a furnished room in your main residence. The scheme is available to both homeowners and tenants, provided the latter have landlord approval. It can be used with short-term rentals through bed and breakfasts, or student hosting, as long as the criteria are met. There is no need to file a tax return unless you exceed the income threshold or choose to opt out of the scheme due to wanting to claim expenses. Renting a room may affect council tax discounts, benefits and mortgages, so check first. Take time to identify and vet potential lodgers to ensure a smooth process and an amicable long-term living arrangement. What is the rent-a-room scheme? The rent-a-room scheme is a longstanding government initiative that permits homeowners or, in some cases, tenants, to earn tax-free income by having a lodger rent a room in their property. The income is capped at £7,500 per year, so if you share rental income with another person, then the threshold is split in half to £3,750 each. The first iteration of the scheme was introduced in 1992 as rent-a-room relief, aiming to 'incentivise individuals to make spare capacity in their homes available for rent'. It was an attempt to increase the supply of affordable housing and encourage the efficient use of residential space, especially in high-demand areas like London and other major cities. Matt Hutchinson, director at the flat-share site SpareRoom, notes a significant rise in lodgers since the pandemic: 'Landlords still make up the largest share of ads on SpareRoom (26.4pc), but homeowners are close behind at 22.3pc. 'Lodger numbers dropped during the pandemic, as people were more wary about having people in their homes, but we've since seen a sharp increase in homeowners advertising rooms – up 38.4pc between January 2022 and 2025.' Example A homeowner rents out a spare bedroom for £500 per month, which comes to £6,000 per year, well below the tax-free threshold. Therefore, they pay no tax on this income and don't need to inform HMRC. Who can use the rent-a-room scheme? The rent-a-room scheme can be used for more situations than you may think. To qualify, you can be either a resident landlord or a tenant in rented accommodation. Here are some aspects that must apply: Main residence: The property must be your primary home, where you live. You cannot claim the relief if you're renting out rooms in a property that isn't your main residence. Resident landlords: If you own and live at the property, you are considered a resident landlord and can therefore rent out a room and benefit from the scheme. Tenants: If you rent the property you live in, you can be eligible for the rent-a-room scheme, provided you have express written permission from your landlord. Furnished accommodation: This is an essential piece of criteria; the room you rent out must be furnished. Unfurnished rooms do not qualify for the scheme. Short-term lets: You can use the scheme for short-term rentals as long as the property remains your main residence. This means you can benefit from the scheme even if you run a bed and breakfast or advertise a room on Airbnb. While the scheme can be used for short-term lets, homeowners should be mindful of local regulations. Chris Norris, of the National Residential Landlord Association (NRLA), said: 'Provided the homeowner has the right to sublet, there should be relatively few legal risks. There are some areas where the amount of time that a property can be subject to a short let is limited, though – this is the case in London [where there is a limit of 90 nights]. In those cases, a landlord would need to be cautious about breaching planning rules.' Ineligible scenarios Certain situations disqualify you from using the scheme: Second homes: The room must be located at your main residence, not a second home. Also, if you live abroad and rent out your UK home, you cannot claim the relief. Separate properties: If the room is in a separate building from your main home, such as an annexe with its own entrance, it doesn't qualify. Homes converted into separate flats are also ineligible. Business use: Rooms used primarily for business purposes, like offices, are excluded. How rent-a-room tax relief works The way the rent-a-room scheme tax relief works is remarkably simple, especially if you are earning below the £7,500 threshold through rent paid by any lodgers. However, making sure you follow these rules correctly is still essential to ensure everything remains above board. Automatic tax exemption The reason the application of tax relief through the rent-a-room scheme is so simple is that it's automatic. In other words, if you earn below the £7,500 threshold through this form of income, you do not have to alert HMRC or even submit a tax return (providing you do not already have to submit one due to other income sources). However, it is still strongly recommended to keep records of your rental income in case HMRC requests it. Earning above the threshold If you generate enough rental income to exceed the £7,500 threshold (£625 per month), then this additional income will need to be declared in your self-assessment tax return. In this case, you'll need to indicate that you're opting into the scheme, which will be an option on the tax return. The amount you earn over the £7,500 threshold will be taxed depending on your personal income tax rate, i.e. how much you earn through all income sources. For instance, if you are a basic-rate taxpayer, you will pay 20pc on any income generated above the threshold, provided you have opted into the scheme. Expenses One thing to consider before claiming rent-a-room relief is expenses. You can't deduct allowable expenses and benefit from the rent-a-room scheme at the same time, so you'll need to weigh up which option will be most tax-efficient for you. The two options for tax relief are: Claim rent-a-room relief: Pay tax on the gross income that exceeds the £7,500 threshold, without deducting any expenses. Actual profit basis: Pay tax on your actual profit, which equates to total rental income minus any allowable expenses such as maintenance, utilities, insurance, etc. Example 1 You earn £10,000 in rental income and have £2,000 in expenses: Claim rent-a-room relief: Taxable income = £10,000 – £7,500 = £2,500 Actual profit basis: Taxable income = £10,000 – £2,000 = £8,000 In this example, claiming rent-a-room relief is far more profitable. Example 2 You earn £10,000 in rental income but have had to pay £3,000 on a new boiler and another £5,000 on structural repairs. Claim rent-a-room relief: Taxable income = £10,000 – £7,500 = £2,500 Actual profit basis: Taxable income = £10,000 – £8,000 = £2,000 In this example, claiming expenses reduced your taxable income by £500. Remember, you can always choose the more tax-efficient method at the end of the tax year, depending on any expenses you've incurred throughout the year. Lodgers vs tenants: legal differences and implications There are some distinct legal differences between tenants and lodgers. Tenants have more rights, whereas for lodgers, the arrangement is typically more flexible. Mr Norris clarifies the fundamental distinction: 'I think the most common misunderstanding is that a lodger in someone's home is not a tenant. They have a licence to occupy part of the property, which does not imbue the same rights or security as a tenancy. Landlords still have a responsibility to provide a safe home, but the arrangement is different.' With a lodger, landlords can: Retain access to the room, whereas they need permission to access the property when a tenant is renting it Receive a deposit without entering it into a deposit protection scheme, which is required for tenants Be on the hook for council tax, whereas tenants are typically responsible for paying this. Evicting a lodger One of the main benefits of having lodgers rather than tenants is in relation to eviction. Evicting a tenant can be an arduous process, which is to get even more difficult when the Renters Rights Bill is introduced. For lodgers on the other hand, landlords can terminate the agreement by providing 'reasonable notice', usually in line with the rental payment period. The amount of time you need to provide is dependent on whether they are an 'excluded occupier' or have basic protection. However, resident landlords should still be aware of the potential challenges. Mr Norris cautions: 'Resident landlords have to be very aware of their own safety and security, and just because you have the legal right to ask someone to leave doesn't mean that there are not risks involved or that the lodger will necessarily comply.' According to government guidance, the lodger is considered an excluded occupier if 'you or a member of your family share a kitchen, bathroom or living room with them'. Citizens Advice says, the notice period for an excluded occupier should be the same as the 'rent period'. If you do not share these common areas with your lodger, you will have to get an order from the court to evict your lodger. One thing to be aware of is that a lodger can automatically become a tenant if you move out of the property, in which case your legal obligations would change. Health and safety obligations As a landlord, benefiting from the rent-a-room scheme or otherwise, you are still responsible for ensuring the property is safe and habitable. This includes the following legal obligations: Gas safety: Annual checks by a Gas Safe registered engineer. Electrical safety: Regular inspections and maintenance of electrical installations. Fire safety: Installation of smoke alarms on each floor and carbon monoxide detectors where applicable. Furniture compliance: All furniture provided must meet fire resistance standards. If you are a homeowner, taking in a lodger can void your mortgage terms if you don't inform you're provider first. It can also void your home insurance policy, so be sure to check the conditions. Paula Higgins, of the Homeowners Alliance, also advised homeowners to make sure they've factored in the full financial implications of taking in a lodger beforehand. 'When you're thinking about the finances, remember to factor in all the costs,' she said. 'The rent you charge will need to cover the increase in your utility bills. Crucially, if you currently live alone, you will lose your 25pc single-person discount on council tax, so it's vital to build that into your calculations to ensure the arrangement is financially worthwhile.' How to find the right lodger in six simple steps Once you've decided to take in a lodger, finding the right one can be a daunting task. Here, we've outlined six simple steps to guide you through the process. Steps 1-3: Finding a lodger Define your ideal lodger: Before jumping into the search process, make sure you know exactly who you're looking for, and what kind of person aligns with your lifestyle. For instance, if you are an early riser who typically likes to be in bed early then this is probably something you will value in a lodger. Create a compelling advert: By determining exactly the kind of person you're looking for in step 1, you will be able to craft the perfect advertisement for your spare room. Highlight key features of your property, such as location and amenities (high-speed internet, for example), and set out the house rules and what you're looking for in a lodger to filter out inappropriate applicants. Include high-quality images to show your property in the best light. Make use of multiple advertising channels: Don't feel limited to just one online platform. These can include but are not limited to: dedicated flat-share portals like SpareRoom and Roomies, social media forums, community boards like a local gym or cafe and educational centres if you're open to housing a student. You can also use platforms like Airbnb for short-term rentals. Steps 4-6: Screening potential lodgers Conduct thorough interviews: A potential lodger may look great on paper, but you won't really know without meeting them in person. Conduct a thorough interview with candidates to get a feel for your compatibility as housemates. Perform background checks: Make sure to request references from previous landlords or employers to validate their credentials. You can also conduct credit checks to clarify their financial stability. It is a legal obligation to check if they have the right to rent in the UK. It is of vital importance to ensure that your screening process is as thorough as possible. Ms. Higgins said: 'It's not just about ticking boxes; it's about making sure their story adds up. Take the time to check employment details and follow up on references. Ask yourself, why are they looking for a room right now? Are they a young professional starting a new job, or a student here for a few months? A clear and plausible story is a good sign. Don't be afraid to trust your instincts if you spot any red flags.' Establish a clear agreement: Draft a written lodger agreement outlining the terms of the arrangement, including rent amount, payment schedule, notice period and house rules. This sets a precedent for the relationship and can prevent future misunderstandings. Miss Higgins outlined why a clear agreement can be invaluable: 'Clear communication from day one is the absolute key to a successful lodging arrangement, and that's precisely why a written lodger agreement is so valuable. It's the foundation for managing expectations. 'Be specific about the practical, day-to-day things to avoid future conflict. For example, what are the rules around using the kitchen and where should things be stored? What is the policy on overnight guests? Even small details, like a personal preference for no candles in bedrooms, should be included. Getting this all in writing prevents misunderstandings and ensures everyone feels respected.' Conclusion: Making the most of the rent-a-room scheme The rent-a-room scheme represents a tax-efficient way to boost your income. This can be especially beneficial when entering into retirement should you want to supplement your pension income. But the appeal of the scheme extends across different age groups. Mr Hutchinson said: 'While renters in their late-20s and early-30s still dominate the flatshare market, over-65s using SpareRoom have increased elevenfold in the past decade, and over-55s have tripled, showing how the cost of living is affecting all age groups.' Miss Higgins, who has used the scheme herself, believes the benefits can be personal as well as financial. 'I've rented out a room a few times, and it was a huge help with the mortgage when we first moved into a bigger house. But it's more than just income. There's a sense of security from having somebody else in the house when you're away. Rent-a-room scheme FAQs
