You can earn up to £7,500 a year tax free (as of 6 April 2016) from letting a furnished room in your home. If you intend taking a lodger to be a business arrangement, you're strongly advised to have a legal agreement in place.
In law, a lodging arrangement is defined as 'a residential licence' – the lodger doesn't have exclusive use of the premises and shares the living space with the person letting the room (called 'the licensor').
Lodgers who are licensees don't have the same rights in law as tenants. This means that, for example, a licensor does not need to protect a deposit in a government-authorised tenancy deposit protection scheme. It also means that (in England, Wales and Northern Ireland) it may be able to end a lodging agreement more easily and gain possession of a property because you do not need a court order, provided the lodger leaves peacefully.
However, if the lodger refuses to leave, it's illegal to forcibly evict them and you will need to apply for a court order.
Note that in Scotland lodgers have a 'common law' tenancy and you must always obtain a court order for possession. However, it is probably less likely that a licensee would have a defence to the order than a tenant.
The licensor doesn't have to own the property; a lodger could have a lodging arrangement for a room from another tenant or lodger who lives in the property, as long as they have consent from the owner or landlord to do so.
The main test of whether the arrangement is a licence or a tenancy relates to whether the lodger has exclusive possession of the room or rooms that they occupy. This is important because if the licensee does have exclusive possession the arrangement is usually a tenancy and you would need to get a court order for possession. The tenant would have rights under the Housing Acts and you would need to use one of the grounds in the Housing Act to get possession.
In order for the arrangement to be a licence and not a tenancy, the licensee must not be able to stop the licensor from entering the room or rooms occupied by the licensee. This is easy to establish if the licensor and licensee both share the rooms, e.g. in the case of a kitchen or living room that they both use. However, this might be more difficult in practice with a bedroom. If the licensor has a right to enter the room without the licensee's permission e.g. to inspect or to clean, or if instead of the lodger being allotted a particular room, the licensor can move the lodger to a different room at the licensor's convenience, the arrangement is likely to be a licence not a tenancy.
However, it is important to note that if the matter is ever raised in court, whether or not a licence has been created will be assessed not only on the language of the agreement, but also on how the parties conducted themselves in reality. This means that you should at all times follow the terms of the agreement. For example, if there are restrictions on parts of the house/flat to which the lodger has access, make sure that these restrictions are enforced.
A different but related question of the status of a lodger is the degree of protection they have from eviction under the Protection from Eviction Act 1977. This Act protects residential occupiers of property from eviction without a court order and provides for a minimum of 4 weeks' notice to be given to them. However, lodgers who share accommodation with a resident owner are 'excluded occupiers' who are excluded from this protection. This is particularly true of lodgers who lodge on a bed and breakfast basis. They only need to be given reasonable notice.
The occupier will be an excluded occupier if:
1. they share accommodation with the owner (e.g. the bathroom or kitchen); and
2. the owner occupies the premises of which the shared accommodation forms part as his only or principal home.
Alternatively the occupier will be an excluded occupier if all of the following is true:
1. They share accommodation with a member of the owner's family
2. The member of the owner's family occupies the premises of which the shared accommodation forms part as their only or principal home
3. The owner also lives in the same building as the shared accommodation as his only or principal home
4. The building is not a purpose-built block of flats
A lodger who just occupies the premises for the purpose of a holiday only is also specifically excluded.
The person letting the room to the lodger must use the property as their only or main home from the start and throughout the letting. It's accepted that they may live elsewhere for short periods; but it must be evident that they intend to return to live in the property (for example, they've left belongings at the property).
The arrangement usually isn't a lodging arrangement if the landlord:
A formal agreement with a lodger should include the following:
You can end a lodging arrangement more easily than a tenancy (because the law recognises that you're more vulnerable in your own home if the arrangement with a lodger goes wrong).
This means, generally, that a lodger must leave if you give reasonable notice to quit. But if the lodger refuses to leave, you may need to apply to court to get an order for possession. You can't forcibly remove or evict a lodger from the property; if you do, you'll be committing a criminal offence.
Lodgers need only be given 'reasonable' notice to leave. There is no set notice period unlike the position with a tenancy agreement. If the lodger refuses to leave you can't use force and must then apply for a court order for possession.
You must give the lodger (licensee) at least 4 weeks' notice. If they don't leave at the end of the notice period, you (the licensor) must apply for a possession order from the First-tier Tribunal. This is usually quick and straightforward as the lodger has little or no defence to stay in the property.