Could landlords soon lose the ability to hold tenant deposits?

Let’s look at the key changes and expected timeline.

Insured versus custodial deposit protection schemes

All private landlords who rent out their properties on assured shorthold tenancies must put their tenants' deposits into a government-backed tenancy deposit protection (TDP) scheme. As it stands, they can choose either of the following approaches:

An insured deposit protection scheme allows the landlord to keep a tenant’s deposit in their own bank account if they pay an insurance premium to guarantee the funds can be returned. This adds a little admin to their workload but gives them more control of their finances and cash flow.

In contrast, a custodial deposit protection scheme gives the tenant’s deposit to a government-approved third party to hold and manage for the duration of the tenancy. This free service handles the admin, from collecting the deposit to returning it, but gives the landlord less financial autonomy.

Plans to scrap insured deposit protection schemes

On the 12th of June, Housing Minister Matthew Pennycook confirmed plans to abolish insured tenancy deposit schemes in England’s private rented sector.

According to Pennycook, “Under the insured scheme, there is an inherent power imbalance against tenants given the landlords and letting agents hold the deposit.”

The change aims to:

• Empower tenants to challenge deductions from their deposits if they feel them unfair
• Cut down on the risk of financial fraud and human errors
• Reduce potential delays in the reimbursement of deposits

How this change affects landlords

If the plans go ahead, landlords will need to transfer their tenants’ deposits to a government-approved scheme by specific deadlines. They will therefore have to adapt their admin processes to ensure they know which scheme they’re using and to organise the transfer of funds on time.

The more significant change, however, is the impact on their cash flow, especially if landlords own multiple properties. They will not earn interest on the deposits and will lose immediate physical control of the cash, needing to wait for the third party to release funds to pay for any damage or necessary changes to a property.

Although the plans aren’t yet officially legislated, the government wants to transition to the custodial-only system starting in April next year. We’ll likely see a phased approach where new tenancies enter custodial schemes while existing insured deposits stay in place until a tenancy ends.

How landlords can prepare

Right now, landlords don’t need to do anything specific. But it’s a good idea to think about what the new requirements will mean for your business. An experienced letting agent can guide you through the industry’s evolving compliance requirements, both for the deposit schemes discussed above and for other reforms under the Renters’ Rights Act 2025.

Get crucial insights and advice on your portfolio by talking to your local Winkworth lettings team today.