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It’s always a good idea insist tenants pay a deposit, usually the equivalent of four to six weeks’ rent, to protect yourself against any unpaid bills or damage to your property, but some landlords worry about what to do with such a large amount of money. Here’s what we suggest.

1: Protect it (quickly)

This is a legal obligation and must be done within 30 days of payment.

You can register the deposit with a custodial scheme, which will hold the cash on your behalf until the end of the tenancy, but if you want to keep the cash in your own account you’ll need to register it with one of two insurance-backed schemes.

Once protected, you must issue your tenant with all the correct paperwork telling them where and how the deposit is protected. Upad can take care of the whole process for you as part of our Tenant Sign Up Service (included in our UPay on Success letting package and an optional extra with our UChoose package).

2: Invest it (wisely)

It’s best to open a separate bank or building society account for your tenant’s deposit so that you don’t muddle it with your own funds and spend some of it, accidentally or intentionally.

You won’t get rich on the interest earned, not while interest rates are so low, but your earnings over the year might at least cover the cost of registering the deposit.

Look at current accounts as well as savings accounts as some offer better rates of interest, although check the terms and conditions first.

If you haven’t already got a cash ISA, it might be worth putting the deposit into one of these as any interest you earn will be tax-free, although some pay less interest than regular savings accounts so you need to do the maths.

Wherever you invest the money, make sure you’ll be able to withdraw the whole amount without any financial penalties at the end of the minimum period of the tenancy – which might be only six months if there’s a break clause in the contract - or with a month’s notice if the tenant is on a periodic contract.

3: Return it (swiftly)

The deposit must be returned to the tenant, minus deductions for any unpaid rent, loss or damage to property, after the end of the tenancy. Technically speaking, the onus is on the tenant to request the refund but it’s best practice to repay the deposit within a month of the end of the tenancy.

Deducting money from the deposit can lead to disputes with the tenant and if these can’t be resolved the tenant has the right to complain to the tenancy protection scheme, which will ask you to hand over the disputed amount until its adjudicators have resolved the matter. To try to avoid a dispute, write to your tenants at least a couple of weeks before the end of the tenancy with a gentle reminder of everything they need to do to ensure they get all their money back.

As most deposit disputes occur over the cleanliness of a property it’s best to specify in the tenancy agreement whether you expect it to be cleaned to a professional, ‘good domestic’ or simply ‘domestic’ standard. Having an inventory and check-in and check-out reports should also help to avoid any arguments over the deposit.

Finally, once you’ve refunded the deposit, don’t forget to unprotect it.

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