Tenancy deposit protection (TDP) schemes guarantee that tenants will get their deposits back at the end of the tenancy, if they meet the terms of the tenancy agreement and do not damage the property. Landlords must protect their tenants' deposits using a TDP scheme if they have let the property on an assured shorthold tenancy (AST) which started after 6 April 2007.
If these conditions don't apply - for example, because you live in the property with your tenant - you do not have to protect your tenants' deposits. However, it is still good practice to do so.
Landlords or agents must use one of the three approved TDP schemes to protect tenants' deposits where these conditions apply. If any other scheme is used, deposits are not protected in law. The three approved schemes are:

If you don't protect your tenants' deposits when required to, your tenants can take you to court and you may have to repay them their deposit plus three times the amount of their deposit. You will also be unable to seek possession of your property in certain circumstances. The schemes:

TDP schemes do not cover holding deposits. Tenants can pay you holding deposits before they have signed a rental agreement. You are not required to protect a holding deposit with a scheme before someone becomes your tenant. However, once they are your tenant the holding deposit becomes a deposit which must be protected with a scheme.

Protecting deposits by student tenants

If your tenants are students, you must protect their deposits using a TDP scheme if:

You must protect students' or any other tenants' deposits even if they were paid by someone else - for example, their parents.

Deposits made by a third party

If a tenant's deposit is paid by someone else - eg through a rent deposit scheme - you still must use a TDP scheme.

You should ask the tenant and third party what relationship they are to each other and find out how much the third party wants to be involved in the process. For example, the deposit scheme administrator needs to know if the third party wants the deposit returned directly to them.

Choosing a TDP scheme

There are two types of TDP schemes - custodial and insurance-based. Any landlord can use the custodial scheme but there are some restrictions on who can use the insurance-based schemes.

Tenants can expect a decision as to how much of their deposit is going to be returned to them within ten days from the end of the tenancy. Any part of the deposit kept back at this stage will remain protected in the scheme being used until such time as any dispute is resolved. The exact arrangements depend on the type of scheme used.

Custodial scheme

The Deposit Protection Service (DPS) provides the only custodial TDP scheme.

Under this scheme the Deposit Protection Service holds the deposit money in a bank account. When the tenancy ends, it releases the deposit to the person who is entitled to it.

If you are a landlord based overseas, you must use the custodial DPS scheme, unless you employ a UK-registered letting agent to manage your tenancy.

If you use DPS for tenants using a rent deposit scheme (for example, a council pays the deposit) and your tenant leaves, you can agree with the council or third party to keep the deposit in place for the next tenant.

Insurance-based schemes

Under insurance-based schemes, the landlord or the landlord's agent holds the tenant's deposit and pays a fee to insure it (against the landlord illegally keeping the deposit). If the landlord doesn't pay the tenant the amount they are owed at the end of the tenancy, the insurer will pay the tenant and try to get the money back from the landlord.

If your tenants' deposits are paid in instalments as part of a rent deposit scheme, you must use an insurance-based TDP scheme.

The only two insurance-based providers are:

You can only use the TDS if you belong to an approved professional body - like a trade association - where members must have client money protection insurance. This insurance ensures that any client money held by a business is protected, even if the person or company goes out of business.