Usually a landlord takes a deposit from a tenant when letting a property to cover the cost of any damage caused to the property by the tenant.This is called a security deposit, a damage deposit or a rental deposit. He may also ask for a holding deposit in return for taking the property off the market.
Whe declaring income for tax purposes, you need to consider which type of deposit you are holding for your tenant & the tax treatment. The extent to which the deposit is included as income of the rental business depends on whether all or part of the deposit is retained by the landlord. If at the end of the tenancy agreement the landlord retains all or part of the deposit to cover damage to the property, cleaning costs or other similar expenses, the amount retained is included as income of the property rental business.
What about a holding deposit? A holding deposit is paid by the tenant to secure the property while the tenancy agreement is signed. In return, the landlord will take the property off the market. In the event that the let falls through and under the terms of the agreement the landlord retains some or all of the deposit as compensation for the inconvenience and costs incurred in relation to the prospective let, the amount of the retained deposit should be included as income of the property rental business
Does any of this really matter? Unfortunately if the deposit is incorrectly included in income at the year end, then you will end up paying too much tax.