Beware of snags in the rent-a-room boom: A new tax incentive to let out the spare bedroom may look promising to a hard-up mortgage payer, but taking in a lodger can bring problems, warns David Lawson

A lodger, like a Citizen's Charter, is a very John Majorish idea. Renting out the spare room was suggested by the Government as the best way to resolve two housing crises in one go: people having trouble paying their mortgages would get help with the bills, and the homeless would find somewhere to live.

There may be few signs of home-owners touring the streets offering their third bedrooms as an alternative to a shop doorway, but with mortgage payers lodgers are a big hit.

To encourage the lodging movement, the Government is offering a tax incentive. The Finance Bill now going through Parliament will remove income tax from the first pounds 3,250 of rent paid by a lodger. The idea was part of the Tories' election manifesto, but lodgers were becoming popular long before then, particularly in the centres of large towns and cities.

Falling prices meant that first-time buyers could afford bigger homes, often with an extra bedroom. But the new mood of caution led many of them to limit their repayments by pooling resources with joint buyers - or letting out spare rooms.

There are, however, hidden pitfalls awaiting amateur landlords. 'You have to be careful. Always choose someone you know well,' says John, a young retail consultant who has a lodger in the three- bedroom flat he bought recently in west London. 'My twin had a place with a lodger who turned out to be very odd. You can have terrible problems trying to get rid of someone like that.'

He says that most of the first-time buyers he knows are taking in lodgers without telling their lenders or the taxman. He has taken out double protection against problems by buying jointly with his brother and renting out a bedroom - 'But it is someone we know very well, more a friend than a lodger.'

James Middleton, another young professional, is also planning a joint purchase with a friend who has shared a rented flat for more than a year. But his solicitor - who also happens to be his father - is not happy that there is a lodger already living in the three-bedroom home they are considering.

Even without lodgers, shared purchases can lead to problems, as many buyers found after rushing into deals to beat the embargo on double tax relief in 1988. Friendships have faltered - or turned into open warfare. Joint owners found themselves locked together. Prices fell, leaving partners unable to sell or squabbling about who should shoulder the loss if one wanted to buy the other out.

Mr Middleton's father is planning to prevent that with a contract between the joint buyers about how to settle matters if one wishes to end the partnership. They also have a 'gentlemen's contract' to cover every eventuality that cannot fit into a legal document. 'But you can't have that sort of certainty with a lodger, particularly if it is a stranger,' he says.

Other complications are also floating to the surface. 'No one has explained whether people who rent out a room will be exempt from capital gains tax when they come to sell,' says David MacLean Watt of Cluttons London Residential. 'Until that happens, people are bound to be nervous about taking in lodgers - or keep them secret from the taxman.'

Building societies are wary of allowing subletting because an owner can do a moonlight flit, leaving a horrified tenant to be evicted when the place is repossessed. But lenders have given general approval for taking in lodgers, provided owners reveal all. 'We ask lodgers to sign a letter making it plain that they must leave if the place is sold or repossessed,' said the Woolwich.

But she added that only about three approval requests come in each month. 'We can't know how many people do not tell us, although we have never come across a lodger left in the lurch among around 1,500 repossessed properties.'

The preference for larger flats is casting a shadow over owners of studio flats, which in some areas are becoming difficult to sell. In the boom years, developers converted thousands of large houses into warrens of studios or one-bedroom flats. Buyers stretched themselves to reach these tiny footholds on the housing ladder, expecting to move onwards and upwards quickly.

Now, however, many are stuck on this rung. A new generation is walking straight into bigger homes, and no one on lower wage levels is coming forward to take the cheaper property.

Streatham typifies London's inner suburbs. 'It is difficult to value a studio because there is no market for them,' says Steve Rivers, of the agents Winkworth. Hundreds were bought for pounds 50,000-plus during the boom because first-time buyers could not afford another pounds 10,000 or so for a one-bedroom flat. Today's buyers can make it, however, as incomes have gone up and prices fallen.

Many who bought studios at the peak are likely to be locked in, says Mr Rivers. Their flats are probably worth less than their mortgages, and even if they can stand the loss, few buyers are available. Average incomes among potential buyers on Winkworth's waiting lists are pounds 12,000- pounds 15,000, which qualifies them for property worth upwards of pounds 42,000. Scruffy one- and two-bedroom flats can be found with a little effort for less than pounds 40,000, which leaves little hope for the studio owners.

A market for studios still exists closer to city centres, where prices are higher. In Fulham and West Kensington, for instance, buyers can baulk at the pounds 15,000 gap between a studio and a one-bedroom flat, which will generally start at around pounds 55,000.

John and James are more likely to be the rule than the exception, however. Both have given up renting because they believe this is the right time to buy, but neither is confident enough in the future to take the burden alone.

'There is no housing ladder today, so we are not likely to move again quickly,' says Mr Middleton. 'In those circumstances we want to be comfortable, and that means choosing a big home.' In the past that would have meant stretching to the financial limit. 'But employment is so uncertain that it is better to share the burden rather than worry about ending on the repossession register.'

The proposed tax change involves removing income tax on the first pounds 3,250 of rent for furnished rooms within the main home. It applies to both owners and tenants. If rents go above this figure, taxpayers can choose to pay normal tax on the excess or switch to the same treatment as professional landlords, where the total rent is taxed as profit after deduction of expenses.

The rent-a-room scheme is planned to come into effect in the current financial year. Full details are available from local tax offices.