How To Calculate The Tenancy Deposit Scheme Cap8th Jan 2020
What Is The Tenancy Deposit Cap?
The Tenant Fees Act 2019 caps the size of a tenancy/security deposit to:
- five weeks’ rent (for tenancies with an annual rent of less than £50,000) or
- six weeks’ rent (where the annual rent is £50,000 or higher).
These new rules apply from June 1 2019 but the changes are being phased in over 12 months – making matters potentially confusing for both landlords and tenants.
So we are currently in a transitional period – the rules will change again after June 1 2020.
Here’s what the changes mean for you, based on the three time periods (in chronological order)…
Period 1: Tenancy Deposits Taken Before June 1 2019
Before June 1 2019, there is no limit on the deposit amount. If you are holding a deposit taken before this date you don’t need to reduce it – unless the tenancy is reviewed under a new fixed term agreement.
There is no limit on the deposit amount, regardless of whether you’re dealing with a new fixed-term tenancy or a periodic tenancy (ie, one that has come into existence automatically under the law after the fixed term has expired).
All tenancies become periodic once the agreed fixed term is over (unless a new fixed term is agreed). Under a periodic tenancy, the agreement continues until either the landlord or the tenant gives notice.
It is important to note that – during this pre-June 1 2019 period – default fees were allowed under certain circumstances (such as when a tenant had lost a key or was 14 days or more late in paying their rent).
Period 2: The Transition – June 1 2019 to June 1 2020
If a new fixed term tenancy is signed during this transitional period then the deposit must be reduced to the five- or six-week cap. Default fees are not allowed.
However, if the tenancy becomes (or remains) periodic tenancy then:
- there is no limit on the deposit amount
- default fees are allowed.
Period 3: June 1 2020 Onwards
Just in like the transitional period:
- there is a limit on deposits for fixed-term tenancies – they must be reduced to the five- or six-week cap.
- there is still no deposit limit for periodic tenancies.
But here’s the difference: default fees are NOT allowed – regardless of whether the tenancy is fixed-term or periodic.
Calculating The Deposit Cap For Your Rent
At first glance, calculating the maximum deposit cap should not be too difficult…but don’t be hasty…it is still possible to come unstuck. And the penalty for making a mistake can be costly.
Get it wrong once and you face a civil penalty: a fine of up £5,000. Further breaches within five years are punishable by a criminal conviction, a banning order and unlimited fines.
So it’s important to use the Tenancy Deposit Scheme formula. It’s a simple three-step process:
- Multiply the monthly rent by 12 to get an annual rent
- Divide that annual rent by 52 to get a weekly rent
- Multiply the weekly rent by five or six (depending on whether the annual rent is above or below £50,000).
Want to be absolutely sure that your deposit is below the legal cap? Use the official Tenancy Deposit Scheme calculator.
Tenancy/Security Deposits vs Holding Deposits
Remember that the rules above are for tenancy/security deposits – not holding deposits! The new legislation caps a holding deposit (aka a holding fee) at just one week’s rent.
The refundable holding deposit/fee is payable by the tenant to the landlord (or agent) only after agreeing the following general terms of the let:
- moving in date
- terms of the tenancy agreement
- the rent – and when it should be paid (ie, weekly, monthly)
- who the tenants will be
- the length of the fixed term.
Find Out More About The Tenancy Deposit Scheme Cap
This is a complex area of the law so you need to be absolutely certain that you’re not unwittingly breaking the rules. For more information, contact Coles Miller Debt Recovery Manager Eric Holt, 01202 355695.