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Tax and finance

Renting a room out can be a useful source of income but it's important to know the financial implications before you enter into anything. There are now a couple of schemes designed to make this easier for live in landlords.

Rent a Room scheme

Firstly there's the government's 'Rent a Room' scheme. Under the scheme you can earn up to £4,250 per year by renting out a spare room without paying tax. This is how the scheme works:

You let out a room or part of your main property (it can be a whole floor but not a self-contained flat).

It must be furnished, unfurnished rooms don't qualify.

You don't have to be a homeowner, if you have your landlord's consent you can take advantage of the scheme as a tenant.

If you don't normally fill out a tax return and the income is below £4,250 (around £350 a month) you don't even have to do anything, the exemption is automatic. If the amount you earn is above just let the tax office know.

If you usually fill out a tax return you should consider whether you're better off in the scheme or not. Under the scheme you can't claim expenses for wear and tear, insurance and so on so you may be better paying tax under the rules for residential lettings. This will enable you to offset certain expenses incurred against income. If you usually fill out a tax return and have an accountant you should check with them to see whether you'd be better off under the scheme or not.

If you charge your lodger extra for meals or laundry services this all counts towards your £4,250 so bear this in mind. In addition, if you take in a lodger and co-own your property (with your partner for example) then the allowance is split between the two of you - you can't earn £4,250 each without paying tax. For full details on the scheme see Direct.gov.uk

Buy to share mortgages

Second are the growing number of 'Buy to share' mortgage deals on offer. These vary depending on the lender but the basic principle remains the same. The lender allows you to add £4,250 to your annual income before multiplying the figure. This allows for the amount of tax free income you can earn under the 'Rent a room' scheme as detailed above. In some cases this can enable a buyer to go for a two bed property and rent out the second bedroom.

Lenders offering these products include:

Bradford & Bingley's Rent a Room mortgage which is available to both PAYE and self-employed buyers up to a maximum of 95% of purchase price. Currently it only applies to house purchase and is available via the company's Standard and Horizon mortgages, available through brokers.

Stroud & Swindon's Buy To Share scheme also allows you to add £2,125 for a second room to be rented out. It's available as an option on all of Stroud & Swindon's residential mortgage products.

John Charcol offer a 'rent-a-room' mortgage, buyers must earn £25,000 or more and you can borrow up to 4.25 times on a single income or 3.25 on joint incomes.

None of these companies offer information on these products on their sites (hence no links) so we'd advise you to call them or, in the case of the building societies, pop into a branch to enquire further.