Make money from a lodger

All you need is a spare room, and you could earn an extra £4,250 per year!

Many of us are feeling the pinch right now, and as the bills stack up it can be hard to make ends meet. But if you're struggling financially, have you ever considered taking in a lodger to help out?

If the idea of sharing your home with a stranger doesn't bother you and you have a spare room, renting it out to a lodger is a great way to earn a bit of extra cash. In fact, under the government's Rent a Room scheme you can let out a room to a lodger and receive the first £4,250 tax-free for the 2009-2010 tax year.

If you already share your home with someone else and you both want to let out a room, you can also do this under the scheme. This time you'll receive half the allowance each - up to £2,125 tax-free.

You don't even have to be a home owner to qualify for the scheme - although if you rent your home, it's worth checking your lease to make sure it allows you to take in a lodger. That said, if you have a mortgage, it's always a good idea to check with your mortgage lender will agree to you taking in a lodger.

The important bit

So far you're probably thinking that this all sounds pretty straightforward. But if you are contemplating opting into the Rent a Room scheme, here are some important points to note:

• You must let out furnished accommodation, and you must make sure your gas appliances are checked annually by someone on the Gas Safe Register.
• You can let out a single room, or an entire floor, but if your home has been converted into separate flats, you won't qualify for the scheme.
• You can't claim any expenses related to the letting, such as wear and tear, insurance or repairs.
• If you're going to charge for other services such as meals or laundry, you'll need to add this amount to the rent to work out the total.

• If this total is above £4,250, you must complete a tax return and claim the allowance.

Check your insurance

Another important point to note if you decide to take in a lodger is that you'll need to carefully review your home insurance policy.

For a start, you must make sure you tell your insurer if you are planning to rent out a room. If you fail to do so, any cover you already have in place could end up being declared void. Be warned though that you may have to pay a premium on your home insurance for taking in a lodger.

Some insurers will also only cover you for one lodger, while others will cover you for more. It's also worth keeping in mind that some insurers, such as Direct Line, won't cover students as they are classed as high risk.

However, even if you're covered, be aware that the level of cover you have could be impacted by taking in a lodger. For example, claims for accidental damage, attempted theft, vandalism or malicious acts may not be covered. Theft cover may only be included if there has been evidence of forcible entry. So make sure you check the terms and conditions of your policy carefully.

That said, you may find that each case is reviewed separately - for example, esure points out that a lodger who's a cousin or a friend of the family would be a far lower risk than someone who answered a classified ad.

It's also very likely that your tenant will need to get his/her own contents insurance policy as your tenant's contents probably won't be covered under your main policy. Unfortunately, standard home contents policies generally won't cover a bedroom in a property because it has to have its own locked door. So your tenant would need to apply to an insurer that specialises in renters to see whether he/she could get cover. Endsleigh is one of the few insurers to offer shared house contents insurance.

Criminal convictions

The next big question is what happens to your home insurance policy if your tenant has an unspent criminal conviction? As my colleague Jane Baker pointed out in Don't make this terrible insurance mistake, unspent convictions can invalidate your policy.

This can have serious consequences. If, for example, your home burns down and your tenant had an unspent conviction, even if it's conviction for something as minor as overpayment of benefit, your buildings insurer could refuse to pay out (as this news report shows).

So if you're taking in a lodger, you need to be able to prove you took reasonable steps to find out whether your tenant has an unspent criminal conviction. For example, you should also be able show you performed reasonable checks on your lodger's background and history (such as performing a credit check, and asking for references from your tenant's employer and bank), as your insurer may ask for proof of this later. You may also wish to get your tenant to sign a declaration that he or she has no unspent criminal convictions, and get this witnessed. (Make sure you put a date on this document.)

The good news, however, is that if you take these steps and say, the tenant lies to you, then the policy is likely to remain valid. In other words, if you've taken reasonable steps to find out about any unspent criminal convictions, then you should be OK and a pay-out should be made. If it isn't, you can go to the Financial Ombudsman Service for redress.

Final tips

If you're taking in a lodger, it's always a good idea to draw up an agreement to state what the rent will be, the notice period, which rooms your tenant can use, as well as any other house rules. Bear in mind that if the bills are in your name alone, then you alone are responsible for paying for them. So it's up to you to make sure the tenant pays his or her way.

It's also worth checking out the Room Rental Index at spareroom.co.uk to see what rooms in your area are being let for.

Clearly, letting out your spare room can be a really great way to earn some tax-free extra cash. And if you're happy to share your home with someone else, it's well worth considering. But it's also very complex, so you need to be sure you can get to grips with all the red tape before you definitely say yes.

Get help from lovemoney.com

If you need a bit of help boosting your income, we can help.

First, adopt this goal: Make some extra money

Next, watch this video: How to save when you've got no money

Finally, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?

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