The usual practice when letting a property is for a tenant to pay a deposit to a landlord when moving into the property. The deposit is returned at the end of the tenancy, subject to any deductions for ‘dilapidations’ – any repairs that the tenant has not undertaken although contractually obliged to do so.
On payment the landlord has no legal right over the deposit money; he is only entitled to some or all of the deposit at the end of the tenancy.
The tax position is that a deposit is income to be included in the letting accounts. However, the inclusion in the accounts is deferred until the landlord acquires the right to retain some or all of the deposit, which is usually at the end of the tenancy. It is at that point that the amount of deposit retained is brought into the accounts as income and the cost of repair as an expense.
The repair costs may be greater than the deposit. In this situation the tenant may pay the landlord compensation in addition to the amount of deposit. This additional amount is treated as income if the landlord subsequently re-lets the property.
However, if the landlord does not subsequently re-let then the payment is treated as a capital receipt.
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