Reserve Funds and Sinking Funds for Leasehold Blocks

A reserve fund — often called a sinking fund — is money collected from leaseholders over time and set aside to pay for large, infrequent works such as a new roof, redecoration, or lift replacement. Instead of hitting leaseholders with a single huge bill when the roof fails, the block builds up a pot over the years so the cost is spread and predictable.

For a self-managed block, a healthy reserve fund is the difference between a planned, affordable major works programme and an emergency that nobody can pay for. This guide explains what a reserve fund is, whether your block must have one, how to decide the contribution, and — critically — the legal rules on how the money must be held.

This applies to England and Wales. It is general guidance, not legal or financial advice — see the disclaimer at the end.

Reserve fund or sinking fund — what's the difference?

In practice the two terms are used interchangeably for residential blocks, and most leases use one or the other to mean the same thing: money put aside for future major expenditure.

If a distinction is drawn at all, it is usually this: a sinking fund saves towards the eventual replacement of a specific major asset (the lift, the roof) at the end of its life, while a reserve fund is a more general cushion smoothing out year-to-year peaks in spending. For a typical small block, you can treat them as the same thing — a pot for big future costs that you don't want to fund out of a single year's service charge.

Does your block have to have one?

There is no general statutory duty to keep a reserve fund. Whether you must have one depends on your lease. Read it carefully:

• Some leases require a reserve fund and set out how contributions are calculated — in that case you must collect it.
• Some leases permit a reserve fund at the directors' or landlord's discretion.
• A few older leases are silent, which can make collecting a reserve contribution difficult — you generally cannot charge for something the lease does not allow as a service charge.

If the lease requires or allows a reserve fund, building one is almost always good practice. Without it, the only way to fund a £40,000 roof is a one-off demand splitting that bill across the flats in a single year — exactly the kind of bill that triggers arrears and disputes.

How much should the contribution be?

There is no fixed formula, but a sound approach is to base the contribution on a forward maintenance plan:

1. List the major components of the building and their expected remaining life — roof, external decoration cycle, windows, lifts, communal heating, fire safety systems.
2. Estimate the replacement or renewal cost of each, in today's prices, and add a margin for inflation.
3. Divide each cost by the years until the work is due to get an annual provision.
4. Add the annual provisions together and apportion the total across the flats using the service charge percentages in the leases.

A surveyor can produce a planned maintenance schedule (sometimes called an asset management plan) that does this properly — worth the cost for a block facing significant works. As a rough sense-check, many managing agents aim to hold a reserve broadly proportionate to the building's likely 5-10 year major works liability, but the right figure is the one your maintenance plan produces, not a generic percentage.

Remember that major works funded from the reserve still require a Section 20 consultation if any leaseholder's share of the cost exceeds £250 — having the money saved does not remove the consultation duty.

The legal rule you cannot ignore: holding the money on trust

This is the part self-managed blocks most often get wrong. Service charge money — including reserve and sinking fund contributions — does not belong to the company or the landlord. Under Section 42 of the Landlord and Tenant Act 1987, sums paid by contributing tenants by way of service charges are held on trust: first, to meet the costs the service charges were payable for, and subject to that, on trust for the contributing leaseholders.

In practical terms:

• The money is not the RMC or RTM company's asset and must not be mixed with the company's own funds or used for anything outside the service charge purposes.
• It must be held in a service charge bank account, separate from any director's personal account. (The Act allows the money to be held as a single fund or in separate funds — what matters is that it is held on trust for the leaseholders, not absorbed into general company money.)
• Interest earned on the fund forms part of the trust fund — it belongs to the leaseholders, not the company.
• If a leaseholder sells their flat, they generally do not get their reserve contributions back — the fund stays with the building for the benefit of the leaseholders for the time being. This is normal and should be explained to sellers.

Getting this wrong is a serious breach of trust and exposes volunteer directors personally. Keep the reserve in a clearly identified service charge account and account for it separately in the year-end service charge accounts.

How the reserve appears in your accounts

The reserve fund is shown in the service charge accounts, not the company's Companies House accounts (the two are separate documents). Each year the accounts should show the opening reserve balance, contributions received, any expenditure drawn from the reserve, interest earned, and the closing balance. Leaseholders are entitled to see this — transparency about the reserve is one of the strongest defences against disputes.

Quick checklist

• Check whether your lease requires, permits, or is silent on a reserve fund
• Base the contribution on a forward maintenance plan, not a guess
• Apportion the contribution using the lease service charge percentages
• Hold the money on trust in a separate service charge bank account
• Never mix reserve funds with company or personal money
• Treat interest earned as part of the fund (it belongs to leaseholders)
• Account for the reserve separately and transparently each year
• Still run a Section 20 consultation when spending it on qualifying works

LevyBoard is building software for volunteer block directors that tracks the reserve fund alongside demands, expenditure, and year-end accounts — so the trust money is always accounted for separately and the audit trail is ready if a leaseholder asks.

This guide covers reserve and sinking funds for residential leasehold blocks in England and Wales. It is general information, not legal or financial advice. Reserve fund obligations depend on your specific lease — for the right contribution level or a complex lease, consult a surveyor or a solicitor specialising in leasehold law, or the free service at the Leasehold Advisory Service (LEASE).

Sources

• Landlord and Tenant Act 1987, Section 42 — service charge contributions to be held on trust
• GOV.UK — Leasehold property: service charges and other expenses
• LEASE — Service Charges Guidance
• RICS — Service Charge Residential Management Code