As a landlord you should make sure that you take a security deposit from your tenant before letting out your property and ensure that the terms are clearly stated in the letting agreement. It is also worth considering where the best place is for you to keep the deposit. But is the deposit taxed?

What do I need to know?

If you are letting out a property as a landlord, you should take a deposit from a tenant to cover the cost of any damage caused to the property by the tenant.

The deposit that you charge cannot be more than five weeks’ worth of rent. The items covered by the security deposit should be stated in the letting agreement.

If the property is let on an assured short hold tenancy, then the tenants deposit must be placed in an official tenancy deposit scheme.

Will I be taxed as a landlord?

If you take the full security deposit amount, this may be taxed as income of the rental business.

If a landlord takes a security deposit from the tenant and holds it for the period of the tenancy and returns it at the end of the rental period, then the deposit will not be classed as income from the rental business.

If at the end of the tenancy you decide to keep all of some of the deposit to cover costs for damage on the property, then this will be included as income of the property rental business.

Example:

Susie invests in buying a property to buy to let. She collects a £1,000 deposit from her tenant and the terms are set out in the tenancy agreement.

The let came to an end in June 2019, and the tenant had failed to meet the needs required in the tenancy agreement of having the carpets cleaned and they have damaged the bathroom, which needs to be repaired.

Susie and the tenant agree that £350 of the deposit will be retained to cover the damages and cleaning costs, and the remaining £650 was returned back to the tenant.

Susie spends £280 on the bathroom and £75 having the property professionally cleaned.

When she completes her tax return, she must include the £350 as income retained from the tenant.

She can deduct the cost of cleaning the property (£75) and repairing the bathroom (£280). Susie spent £355, which is more than the amount that she retained from the deposit, so she would get the £5 relief.

Further Actions

As a landlord you should make sure that you take a security deposit from tenants and it may be worth keeping it in an official tenancy deposit scheme, as otherwise it may be classed as business income.

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