When I return a deposit, do I have to include any interest accrued?

Question

When I return a deposit, do I have to include any interest accrued?

This is dependent on the scheme in which you hold your tenant’s deposit.

If the deposit is being help by the Deposit Protection Service, which is a custodial scheme, there will be no interest to pay back. This is because the scheme is free for both landlords and tenants to use, and is paid for using the interest accrued over the duration of the deposit being held.

However, if the deposit has been held with an Insurance-based scheme, such as My Deposits or the Tenancy Deposit Scheme, you as a landlord (or your nominated agent) are responsible for holding the deposit and therefore will accrue the interest in a nominated account. In this instance, you should pre-agree with the tenant what will happen at the end of the tenancy. Make sure the arrangement is included in the tenancy agreement, which will make it a legally binding arrangement.

Do bear in mind that there is a cost associated with an insurance-based scheme, so many landlords choose to retain the interest in order to pay this cost – using the same format as the custodial scheme. This helps you avoid levying any additional upfront fees to your tenant, which can be very appealing when they are faced with the expense of moving home!

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