The Difference Between a Holding Deposit and a Tenancy Deposit

Summary

Every independent UK landlord has undoubtedly heard of holding deposits and tenancy deposits. However, do you understand the differences between the two? Although they’re both payments made to landlords by tenants as part of a tenancy agreement, there are some key distinctions that every landlord should be aware of.

In this article, we’ll explain the difference between a holding deposit and a tenancy deposit, as well as provide helpful advice on managing them both.

What is a holding deposit?

Unlike a tenancy deposit, a holding deposit is money paid during the rental application process to help secure the property while the tenant’s application is being processed. A prospective tenant submits this fee to the landlord or letting agent to “hold” a property off the market until referencing checks are completed.

If the tenant chooses to take the property, the landlord will put this holding deposit towards their tenancy deposit. If, however, they decide not to proceed with renting the property, then the holding deposit will be retained by either the landlord or letting agent for administrative costs and advertising expenses associated with taking on a tenant.

The Tenant Fees Act 2019 states tenants must not pay more than one week’s rent as a holding fees. You should specify this amount in your tenancy agreement.

What Is a Tenancy Deposit?

In the UK, when a tenant rents a property, they may pay a tenancy deposit to their landlord at the inception of their rental period. This deposit covers any costs associated with damages or non-compliance with agreements during the rental period. The landlord has the right to hold onto the deposit until the end of the tenancy and use it to repair any damages caused by the tenant(s).

The tenancy deposit amount is typically equivalent to one month’s rent plus an additional amount to cover damages or other fees, such as late rent payments. If there are no disputes over damages or cleaning costs at the end of the tenancy, the deposit will be returned to the tenant in full.

However, if there are issues with damages or cleaning that goes beyond normal wear and tear, the landlord may withhold some or all of the deposit. If such a dispute arises, it should be resolved through an independent third party rather than directly between the tenant and landlord.

Note

There may often be other reasons to eject a tenant from your property, so go through this guide on ending a tenancy in the UK to avoid breaking the law.

What Is the Difference Between the Two Deposits?

The main distinction between a holding deposit and a tenancy deposit is that the former is paid to “hold” a property, while the latter is paid when a tenancy agreement is signed.

While we’ll go in-depth on their other differences shortly, the table below summarises them.

First, a prospective tenant typically pays a holding deposit to reserve a rental property before signing a tenancy agreement. It’s essentially a show of good faith and an indication that the tenant is serious about renting the property. On the other hand, the tenant pays a tenancy deposit as security against any damages or unpaid rent at the start of the tenancy.

Second, the holding deposit amount is usually small, typically equivalent to one week’s rent or less. In contrast, a tenancy deposit is usually equal to several weeks’ rent or more, depending on the terms of the tenancy agreement.

And lastly, a holding deposit is usually non-refundable if the tenant decides not to proceed with the tenancy. Conversely, a tenancy deposit is usually held for the duration of the tenancy and refunded at the end of the tenancy, provided that the property is left in good condition and there are no outstanding rent or other charges.

How Does the Tenancy Deposit Scheme (TDS) Work?

The Tenancy Deposit Scheme (TDS) works by setting out rules landlords must follow when holding a tenant’s deposit. The deposit must be kept in a secure TDS scheme for the duration of the tenancy, and an independent third-party adjudicator can help resolve disputes regarding deposit returns.

Landlords must enroll each deposit into a TDS for legal protection in England or Wales. Once a tenant pays the tenancy deposit, the landlord must protect it securely and transfer it into an approved government insurance scheme within 30 days.

It’s important to note that property owners can’t charge tenants both a holding deposit and a tenancy deposit simultaneously. Still, they can require both during the tenant’s tenure as long as they’re kept separate. If a landlord fails to protect a tenant’s deposit within 30 days, the tenant can take legal action against them.

Tip

Rentila allows landlords to establish an excellent relationship with their tenants by offering a tenancy agreement template and automatically generating rent receipts for sending to tenants.

To ensure compliant tenancy deposits, landlords should use Rentila’s features to protect their tenants’ deposits within the legal timeframe.

Are There Any Legal Requirements for the Holding Deposit and Tenancy Deposit?

The UK’s laws around holding deposits and tenancy deposits are pretty strict. This explains why an understanding of legal responsibilities is one of the common causes of stress for landlords.

If you’re a landlord, here’s what you need to know about the legal requirements for these two types of deposits.

Holding deposit

A holding deposit is governed by the Tenant Fees Act 2019, which states that landlords can’t charge more than one week’s rent for this type of deposit. The landlord must return the holding deposit within 15 days if the tenant decides not to comply with the tenancy agreement.

Tenancy deposit

Tenancy deposits are covered by Section 213 of the Housing Act 2004. This law states that landlords must protect all tenancy deposits in an approved scheme and provide written evidence to the tenant within 30 days. The maximum allowable tenancy deposit is capped at five weeks’ rent if the annual rent is below £50,000 and six weeks if the figure sits between £50,000 and £100,000.

Ensuring you comply with these laws when dealing with holding and tenancy deposits is vital. Otherwise, you may be liable for significant fines or other penalties imposed by authorities. The good news is that with Rentila’s cloud-based property management software, you can easily keep track of your holding and tenancy deposits, ensuring all your legal obligations are met.

How Rentila Can Help Independent Landlords With Their Deposits

Independent landlords in the UK want to ensure their deposits are secure and compliant with the law. This is where Rentila can help — by providing a comprehensive solution for managing deposits.
Rentila simplifies the deposit process, providing independent landlords with the following benefits:

A complete overview of all deposits.
Easy access to deposit information, including all tenancy agreements, receipts, and tenant contact information.
Automation of payment processing, ensuring all deposits are paid out to tenants on time and within legal limits.
Comprehensive tracking of tenancy deposit transactions and expenses incurred.
Easy tracking and monitoring of any changes in the deposit amount over time.
Automation of tenant notifications regarding their deposits.

Frequently Asked Questions

Does a holding deposit get refunded?

If the landlord decides not to rent, the tenant should receive a full refund of the holding deposit within 15 days of payment. It’s advised not to pay a holding deposit without viewing the property; only pay if you’re genuinely interested in renting the property.

How much can a holding deposit be?

A holding deposit can’t exceed one week’s rent.

Can a tenant refuse to pay a holding deposit?

The tenant can refuse to pay a holding deposit if he is not interested in renting a property. In other words, as long as he is keen on renting a property, he has to pay the holding deposit. The landlord or letting agent may retain the holding deposit if the tenant decides not to proceed with the tenancy or provide inaccurate or deceptive information. Some landlords do not require holding deposits.

Things to remember

When entering a new tenancy agreement, understanding the difference between a holding deposit and a tenancy deposit is essential for landlords and tenants:

A tenancy deposit is refundable and typically lasts the length of the tenancy, covered by Section 213 of the Housing Act 2004,
A holding deposit is non-refundable and is usually paid at the start of the tenancy to reserve the property, governed by the Tenant Fees Act 2019,
Landlords must enroll each deposit into a TDS for legal protection in England or Wales.