Blog by James Attew, Commercial Recoveries Solicitor
Coverage of George Osborne’s Summer Budget of 2015 was largely dominated by the £12 billion of cuts made to the UK’s welfare budget.
The Chancellor has balanced these measures with increases in tax relief, notably under the rent-a-room scheme. The scheme is designed to benefit a person that lets out furnished accommodation in their home to another. Under the scheme, that person may earn tax free rental income up to a threshold level.
Until this budget, the threshold level for this relief was £4,250.00. This level had remained in place since 1997 and, given that a person’s personal allowance on income was £4,045.00 in 1997 and was increased in the last budget to £10,600.00, you may be forgiven for thinking that an increase in rent-a-room relief was well overdue.
As of April 2016, this relief will now been increased to £7,500.00, meaning that tax will now only be payable on rental income that exceeds this level.
But what does this mean in practice? Although we cannot be certain, it is reasonable to assume that this measure will lead to an increase in people making a decision to rent a room in their property, with a view to obtaining some valuable tax free income.
This may be a tempting prospect, particularly where personal finances may be feeling the pinch in an economic climate that remains difficult. However it is vitally important that, if you are considering letting a room out under the scheme, you consider the potential issues that may arise with your newly-acquired cohabitant.
Often, agreements of this nature are entered into on a ‘casual’ basis between the parties, with no written agreement that properly defines the terms on which the room will be let, including the circumstances where you can terminate the agreement and how much notice you need to give the cohabitant.
Failure to agree these important terms at the outset may lead to considerable difficulties in recovering possession of the room; it may be that any dispute is not able to be resolved without significant expense of your valuable time and money.
To safeguard against this, if you are considering renting a room in your home out to another person, I would urge you to take legal advice and, if you decide to proceed, to have a comprehensive written agreement drawn up that clearly defines the rights and responsibilities of both you and your prospective cohabitant.