A room with a revenue

Homeowners who want to boost family income by renting out a room to lodgers for the long term should consider installing a separate kitchen or bathroom.

As stock markets fall and interest on savings plummets, increasing numbers of homeowners are taking advantage of the Inland Revenue's Rent a Room scheme, which allows you to earn up to ?4,250 a year tax-free by renting out a furnished room in your home. But the terms of the scheme state that lodgers should have access to 'family rooms', something which many people find too intrusive. In reality, many lodgers do not exert their right to use the living or sitting rooms, particularly when sharing with a family with children. But usually there is no escape from sharing the kitchen or bathroom.

Landlords John and Caroline Rees have got around this problem by including a completely separate kitchen in the deal.

When, two years ago, the couple first looked around their four-bedroom house in Brixton, South London, they were slightly surprised to find a small room fitted out as a second kitchen on the third floor. However, when they decided to rent out their converted attic last year, its use became obvious.

'We share the front door, the stairs and the bathroom, but otherwise our tenant is completely self-contained,' says Rees.

This allows the couple, who are expecting their first baby this week, their privacy, but also enables the tenant to live a normal life. 'She even has dinner parties, and it doesn't disturb us. It makes no difference to the way we live. In fact, because we live in a largish house, it's quite nice to have someone else knocking about. It's not at all intrusive, but then we've got the perfect lodger.'

Toby Atkinson has had several lodgers who lived in the main body of his house, sharing all the rooms and in some cases becoming part of the family. But last year he and his wife Sarah felt they needed more space and privacy, so decided to make the attic into a separate lodging area. The couple had to convert the attic from scratch, putting in a bedroom with kitchenette and an ensuite toilet and shower room. The conversion cost ?30,000 and the Ikea kitchenette - a stainless steel-topped unit with built-in sink, two-ring hob, fridge and cupboard - another ?500. The couple live in a less-fashionable part of London, and Toby says similar properties with an attic conversion only go for about ?20,000 more than those without, meaning he has possibly lost about ?10,000 on the deal. But by charging rent of ?100 a week, Toby estimates that even allowing for the room to be vacant for a few weeks now and then, the entire price will be covered within six years.

The shower is electric, so the tenant is not competing with the family for hot water, and Toby decided to install a microwave rather than oven because he didn't think heavy-duty cooking was suitable in what is, after all, a bedroom. 'It wouldn't suit someone who is very keen on cooking, but our tenant is a young professional who spends a lot of evenings out with her boyfriend, so it's ideal for her,' he says.

How does Rent a Room work?

You can earn ?4,250 tax- free each tax year from furnished accommodation in your only or main home. You cannot claim any expenses or capital allowances.

If you earn more than ?4,250 in rent in any tax year, you can either:

· not use the rent a room exemption but pay tax on the full profit you make after expenses and capital allowances have been deducted, or

· pay tax on the amount of rent over ?4,250.

The former option might benefit you if you have paid a lot to do up the room - this expense can be set against your profits and may result in a lower tax bill than if you chose simply to pay tax on anything over ?4,250.

You must inform your house and contents insurers that you have a lodger. This may result in a slightly higher premium - John Rees pays an extra ?150 a year to include his lodger - but your insurance will otherwise be invalid if you try to claim, even if the damage or loss has nothing to do with the tenant.

It's also a good idea to inform your mortgage lender, even though most are unconcerned as long as you are living in the property.