Holding Deposits vs Tenancy Deposits: a clear-eyed guide for London landlords and renters

When a flat changes hands in the private rented sector, two different pots of money often get talked about as if they’re the same thing. They aren’t. One is short-term and provisional, used to take the advert down while everyone gets their ducks in a row. The other sits there for the life of the tenancy, protecting against rent arrears and damage. Mixing them up leads to stress, crossed wires and—too often—avoidable disputes. Let’s separate myth from rule of law, and show how to stay on the right side of both.

The holding deposit in plain English

A holding deposit is the small, up-front sum that reserves a property while references and paperwork are completed. In England and Wales it’s capped at no more than one week’s rent, and it isn’t a fee—it’s a temporary stake that should either come off the first month’s rent or be handed back, depending on what happens next. Scotland is different: you can’t charge a holding deposit there at all. 

Timing matters. Once a holding deposit is paid, there’s a default “deadline for agreement” of 15 days for everyone to progress to a signed tenancy (you can agree a different deadline in writing). If the landlord or agent pulls out, the money goes back. If the applicant walks away without good reason, or provided misleading information that causes them to fail referencing or right-to-rent, the landlord can usually keep it. Put the conditions in writing before any money changes hands; it prevents arguments later.

Two practical niceties that often go unsaid: once you take a holding deposit you should stop advertising and you should not take another holding deposit on the same property at the same time. Those guardrails sit alongside the one-week cap to keep things fair. 

The tenancy deposit: what changes after move-in

A tenancy (security) deposit is different. It’s usually up to five weeks’ rent for annual rents under £50,000 (six weeks above that) in England, and it must be protected in an approved scheme within 30 days of receipt. Protection isn’t just paying the money into a scheme; landlords must also serve the tenant with the scheme’s prescribed information within the same 30-day window.

Fall foul of those rules and two consequences bite. First, a court can order the landlord to pay the tenant up to three times the deposit as a penalty. Second, you can’t validly serve a Section 21 notice until the deposit is returned or the paperwork is corrected (and even then, the financial penalty risk remains). These aren’t idle technicalities; judges do enforce them. 

Custodial vs insured: picking the right home for the deposit

In England and Wales, you have a choice of government-approved schemes. The Tenancy Deposit Scheme (TDS) is the only UK-owned, not-for-profit provider and works in two flavours: custodial (the scheme holds the money for free) and insured (the landlord holds the money, paying a per-deposit fee). If you’re an NRLA member, there are published discounted insured rates, while custodial protection is free either way. The attraction of custodial is simplicity; insured can suit landlords with tight cash-flow systems who are disciplined about ring-fencing client money.

Whichever route you choose, deposit disputes at the end of a tenancy are handled by the scheme’s alternative dispute resolution (ADR). The quality of your evidence—photos, check-in reports, dated invoices, correspondence—usually decides the outcome far more than the eloquence of your covering letter.

What good practice looks like (for both sides)

For landlords and agents, start clean: set out the holding-deposit terms in writing, including the 15-day deadline, what counts as “reasonable steps”, and how the money will be applied to the tenancy if it proceeds. Stop advertising once you’ve taken the holding deposit, and keep the applicant informed while references are running. If it becomes clear the tenancy won’t happen, don’t sit on the funds—explain your reasoning and return them promptly where appropriate. 

For tenants, read the holding-deposit terms before paying, disclose anything that might affect referencing (income blips, CCJs, a guarantor requirement) and ask for a receipt that states the deadline for agreement. After you move in, expect the deposit-protection certificate and prescribed information within 30 days; if they don’t arrive, chase in writing. Lack of protection or paperwork can later invalidate a Section 21 notice, which is leverage you may prefer never to need. 

Where most disputes are won (or lost)

The most common flashpoints—professional cleaning, wear vs. damage, garden condition, missing keys—are rarely about the law and usually about evidence. A dated, independent inventory and check-in report, signed photos, and a clear check-out record make ADR decisions straightforward. Without them, even perfectly reasonable deductions can be knocked back. This is precisely why serious landlords treat the inventory as part of compliance, not an optional extra.

A quick recap you can actually use

Reserve with a holding deposit (England & Wales only, max one week’s rent), agree a written deadline, and be transparent about referencing. Once the tenancy starts, protect the deposit within 30 days and serve the prescribed information. Choose custodial for simplicity or insured for control, but in both cases keep immaculate records. If a dispute arises, your inventory and dated photos will do the heavy lifting.

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