Yahoo Finance Homeowners who take on lodgers are stung by stealth tax raid
Homeowners taking on lodgers are paying more tax under a stealth raid on rental income.
Property share site SpareRoom said that there has been a 89pc increase in households taking in a lodger between January 2021 and January 2024 – and credits the spike to biting mortgage costs.
Yet at the same time, the “Rent-a-room relief” for UK homeowners has only been increased once since it was introduced in 1997, from £4,250 to £7,500 in 2016 under former chancellor George Osborne.
It comes as mortgage costs and rents have soared. Over the past four years – as far as SpareRoom’s data goes back – rents for a room in the capital have risen by 34pc, from £757 to £1,014.
If this level of rental inflation were applied to the Government’s “Rent-a-Room” tax-free threshold, this would bring it to £10,050.
In London, the average monthly room rent was £1,014 at the end of 2023 – up 9pc from £934 in 2022. But in West Central London the average rent is now £1,351, according to SpareRoom.
This means in London as a whole, families will pay £1,867.20 this year in tax on average. While families in West Central London will pay as much as £3,484.
Matt Hutchinson, a director at SpareRoom, said if the Government wants to help both homeowners and struggling renters, it should seriously consider increasing the scheme’s tax thresholds.
He estimates that there are more than 20 million empty bedrooms in owner-occupied properties in England alone.
Currently, any rental income over £7,500 is taxed each year at 20pc, 40pc or 45pc – depending on an owner’s income.
Mr Hutchinson added: “It’s no surprise the number of homeowners looking for a lodger has spiked in the first week of 2024. You’d have to work a lot of hours in a second job to come close to the income you can earn from a lodger.”
Shaun Moore, a tax expert at wealth manager Quilter, said frozen thresholds mean a tax burden “weighs heavy” on people trying to let out their spare room in London.
He added: “During the Autumn Statement last year the Government tried to create the illusion that through ‘giveaways’, such as the reduction in the National Insurance rate for employees, that it was decreasing the historically high tax burden.
“However, the reality is that through not modernising our tax allowances people are getting squeezed from every angle and this rent a room scheme is just one of many ways the Government is increasing the tax take through the back door.”
Last year, brokerage network Mortgage Advice Bureau said over half (52pc) of prospective home buyers have planned on taking in a lodger to supplement their income.
Higher mortgage rates have shifted the goal posts, both for new buyers and for homeowners whose current rates are up for renewal.
Samuel Mather-Holgate, a broker at Mather and Murray Financial, said he has seen “several clients” taking in lodgers over the past 12 months to help with rising living costs.
Some mortgage lenders will allow this income to be taken into account when they calculate a buyer’s affordability, Mr Mather-Holgate added. So, if additional finance is needed a lodger can boost their hopes of securing a home.
A Treasury spokesman said: ‘The present Rent a Room tax-free threshold of £7,500 strikes the right balance between incentivising people to make spare rooms available for rent and protecting the public finances. Landlords are free to charge rent above the tax-free threshold.’
Recommended
Letting your house without a buy-to-let mortgage is high risk (so do this instead)
