Reserve Funds for Blocks of Flats: How Much to Hold

English law sets no figure. There is no statutory minimum reserve fund for a block of flats, no percentage of rebuild cost, and no requirement to hold one at all. Two things set the number: your lease, which decides whether a reserve can be demanded and for what, and a costed plan of the work the building will need over the next two or three decades. The tax treatment, the bank account and the rules on spending all follow from those two.

What a Reserve Fund Is For

A reserve fund, called a sinking fund in many older leases, collects money now for work the building will need later: roof coverings, external redecoration cycles, window and door renewal, lift replacement, communal heating plant, fire doors, entry systems. HMRC describes these arrangements in the same terms in its guidance on flat management companies: residents pay a set amount into a fund that either meets routine costs or builds up reserves for major future work such as replacing a roof.

It does two jobs. It smooths cost, so nobody is asked for a five-figure sum in a single year for work that has been visibly approaching for a decade. And it spreads cost across successive owners, so whoever happens to own flat 6 in the year the roof is replaced does not carry the whole cost of something that sheltered everyone before them.

It is not a contingency pot for emergencies unless the lease says so. It is not the working float many leases require at the start of an accounting year. It is not a substitute for insurance. And at no point is it the freeholder’s or the managing agent’s money.

The Lease Decides Whether You Can Have One

You cannot demand a reserve fund because it is prudent. You can demand it because the lease says so. Read the service charge schedule with the clauses that actually govern the money in front of you, and look for wording permitting the landlord or the company to set aside sums by way of reserve, provision or sinking fund. Three details decide what you can do with it: whether the power is discretionary (“may”) or mandatory (“shall”); whether it is limited to named items or open to future expenditure generally; and whether the sums are to be held separately from the rest of the service charge.

If the Lease Does Not Allow a Reserve

Then contributions cannot be demanded on account of future major works, and the block has to fund each project when it arrives, usually through whatever interim or supplemental demand machinery the lease does contain. The alternatives are a deed of variation agreed by everyone who needs to sign, or an application by a party to a long lease of a flat to vary it under section 35 of the Landlord and Tenant Act 1987. Both are slow, and neither should be started before you have counted how many leases would need to change and confirmed they are in the same form.

Even Where It Is Allowed, the Amount Is Controlled

Section 19(2) of the Landlord and Tenant Act 1985 provides that where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is payable, and that once the costs have been incurred any necessary adjustment must be made by repayment, reduction or subsequent charges. That applies to reserve contributions as much as to the cleaning budget. It is the provision a leaseholder will reach for if the figure looks arbitrary, which is why the calculation has to exist on paper before the demand goes out.

Setting the Number: Work Back from a Lifecycle Plan

The defensible method is arithmetic, not instinct. In outline:

1. List the building’s major elements and record the remaining life of each, taken from a condition survey by a surveyor who has been on the roof rather than from a desktop guess.
2. Attach a renewal or replacement cost to each element at today’s prices, together with the year the work is expected.
3. State an inflation assumption and apply it. Write the assumption down: it is the first thing a leaseholder will question.
4. Deduct the reserve already held, then spread the remainder across the years available before the first major item falls due, not across an arbitrary period.
5. Apportion by the percentages in the leases, which may differ between flats and between schedules.
6. Rebuild the model every year as part of the budget, and commission a fresh survey periodically.

Two practical points. A fund aimed only at the next project leaves the block short for the one after it, so the plan should run well beyond the first item, which is what a planned preventative maintenance plan is for. And costs are rarely shared evenly: where a lease has separate schedules for a block and an estate, or excludes ground-floor flats from lift costs, the reserve has to be modelled schedule by schedule and then folded into the annual budget as its own line.

Where the Approved Code Fits

From 7 April 2026 the approved code for England is the RICS service charge residential management code and additional advice for landlords, leaseholders and agents, approved by the Approval of Code of Management Practice (Residential Management) (Service Charges) (England) Order 2026 apart from the sections headed RICS standards framework and Freehold houses and variable estate rent charges. The same Order withdrew approval of the 2016 edition. Approval is given under section 87 of the Leasehold Reform, Housing and Urban Development Act 1993, and section 87(6)(b)(iii) allows such a code to deal with the administration of trusts of service charge money. Section 87(7) is the part that bites in a dispute: failing to follow the code does not of itself make anyone liable to proceedings, but the code is admissible in evidence and a tribunal must take into account any provision that appears relevant.

The Rules That Constrain a Reserve Fund

Where the Money Sits, and Who Owns It

Section 42(2) of the Landlord and Tenant Act 1987 provides that sums paid by way of service charge, any investments representing those sums, and any income accruing on them, are held by the payee either as a single fund or, if the payee thinks fit, in two or more separate funds. Section 42(3) then holds that fund on trust to defray costs incurred in connection with the matters for which the charges were payable and, subject to that, on trust for the contributing tenants for the time being, with shares in any residue proportionate to their liabilities under section 42(4). Section 42(9) makes these provisions prevail over any inconsistent trust created by the lease itself, subject to the express terms preserved by section 42(8).

That has three consequences directors sometimes miss. The interest belongs to the fund, not to the company or the agent. The money cannot be lent to another building or used to cover a different block’s deficit. And where the fund is invested rather than simply held, section 42(5) and article 2 of the Service Charge Contributions (Authorised Investments) Order 1988 confine it to deposits with the Bank of England, deposits with a UK deposit-taking business, or deposits or shares in a building society. Equities are not on that list.

Section 42A, which would require trust money to be held in a designated account at a relevant financial institution, was inserted by the Commonhold and Leasehold Reform Act 2002, but the duty it would impose has never been brought into force in England: the inserting provision was commenced in 2002 for specified purposes only and is otherwise prospective. So there is no statutory designated account duty at present. Holding one named account per property, with interest credited to that property, is simply the cleanest way to show the trust has been respected if anyone asks.

On sale, section 42(6) is blunt: on termination of a contributing tenant’s lease the tenant is not entitled to any part of the fund. There is no repayment from the block. The value effectively sits with the flat, and any adjustment between seller and buyer is a matter for the sale contract, handled by the conveyancers, not by the landlord or the agent.

Tax Treatment of the Trust Fund

Where the lease requires the payment, HMRC treats an accumulation trust as existing whether the money is paid to an individual, a company, a trust or an unincorporated association, and whether or not anyone involved describes themselves as a trustee. Where section 42 applies, a resident management company holding reserves is holding them as trustee.

The practical points, from HMRC’s own manuals:

• Service charge and sinking fund contributions fall outside the corporation tax charge for a flat management company, because they are received in the capacity of trustee rather than as beneficial owner.
• Investment income arising on the fund belongs in a trust return, not the company’s corporation tax return. HMRC set this out in Tax Bulletin issue 37 in October 1998, with effect from 1 April 1998.
• The trust rate and the dividend trust rate do not apply. Section 480(3)(c) of the Income Tax Act 2007, as substituted by section 65 of the Finance Act 2007, excludes income from service charges paid in respect of dwellings in the United Kingdom and held on trust from the definition of accumulated or discretionary income, and section 480(5) takes the meaning of service charges from section 18 of the Landlord and Tenant Act 1985.
• Since the 2016 to 2017 tax year, banks and building societies no longer deduct tax at source from interest paid to trustees, so the trustees have to account for it themselves.
• From 6 April 2024, trusts with income of all types up to £500 do not pay tax on, or report, that income as it arises. Where income exceeds that amount it should be reported and tax is payable on the full amount.
• A trust holding tenants’ contributions for the purposes of section 42 is excluded from registration on the Trust Registration Service as an express trust.

One exception matters: section 42 does not apply where the landlord is an exempt landlord within section 58(1) of the Landlord and Tenant Act 1987, which catches certain public bodies and social landlords. If that describes your landlord the trust analysis differs, although HMRC states that the exclusion from the trust rate applies equally to service charges held on trust by registered social landlords who fall outside section 42. Confirm the position with the company’s accountant, since the manuals give HMRC’s view rather than advice on your figures.

When the Fund Falls Short

Most reserve funds that fail do so for one of a short list of reasons: the lifecycle plan was built once and never rebuilt; contributions were frozen to keep the headline service charge down; opening up revealed more work than the survey predicted; fire safety remediation arrived that nobody contemplated when the lease was drafted; arrears left the collected sum below the demanded sum; or the item needed sits outside the wording of the reserve clause.

The options, roughly in the order boards should consider them:

1. Check whether the lease permits a further on-account demand within the year. Many do, and a supplemental demand made under the lease is cleaner than an improvised levy.
2. Phase the works so the first phase fits what is held and the rest is funded across the following years, provided phasing does not make the job more expensive overall.
3. Raise a one-off levy where the lease’s on-account machinery allows it, with the calculation and the shortfall explained in writing before the demand.
4. Borrow only if the lease permits borrowing and permits the interest to be recovered through the service charge. Many leases allow neither, and lenders are cautious with resident management companies.
5. Offer a payment plan to leaseholders in genuine difficulty, agreed by the board and recorded, rather than letting arrears build unmanaged.

Two legal points bear on all of these. First, consultation is driven by what you spend, not by where the money comes from, so the section 20 process applies to reserve-funded projects exactly as to any other. If the requirements are not met and the tribunal does not grant dispensation, recovery is limited to the appropriate amount, which the 2003 Regulations set at a contribution of £250 for works and £100 in an accounting period for a qualifying long-term agreement. Second, section 20B of the Landlord and Tenant Act 1985 means costs incurred more than 18 months before the demand cannot be recovered unless the tenant was told in writing within that 18 months that the costs had been incurred and that a contribution would be required. Blocks that do the work first and worry about funding later run straight into that.

It is also worth saying what you cannot do. You cannot quietly move reserve money into general running costs: section 42(3)(a) holds the fund for the matters the charges were payable for. If a board is unsure whether a proposed contribution or a proposed use is within the lease, section 27A(3) of the Landlord and Tenant Act 1985 allows the First-tier Tribunal to decide in advance whether a charge would be payable if the costs were incurred, and leaseholders have the mirror image of that right when challenging a service charge.

What Is Changing

Two separate things are in motion, and neither has yet changed the law on reserve funds. The service charge provisions in Part 4 of the Leasehold and Freehold Reform Act 2024, sections 53 to 58, were not in force at Royal Assent. Section 56 inserts a new section 21D into the Landlord and Tenant Act 1985 requiring a statement of account in a specified form and a qualified accountant’s report by the account date, which is six months after the end of the accounting period, where the same costs are shared with the tenants of three or more other dwellings. The government has said leaseholders should start to see these changes during 2027, and our note on what is actually in force under the 2024 Act tracks the commencement orders.

The second is the 2025 consultation “Strengthening leaseholder protections over charges and services”, which ran from 4 July 2025 and closed on 26 September 2025. Its section 3.1, mandating reserve funds and planning for major works, asked at questions 116 and 117 whether reserve funds should be mandated for new leases and whether government should legislate to mandate or encourage them for existing leases, and at questions 119 and 120 whether asset management plans should be mandated for new and existing leases. The consultation proposed that those plans cover a period of between five and ten years ahead, and floated exemptions for local authorities, retirement homes on fixed service charges, and small leaseholder-run blocks of four units or fewer. The government response of 15 July 2026 dealt with the measures inside the 2024 Act and said a separate response would follow on the reforms consulted upon that fall outside its scope, which is where mandatory reserve funds sit. So it is a proposal with no start date. Plan on the lease you have, not the lease you may one day be given.

If your reserve has not been recalculated against a survey in several years, that is the first job, and it belongs to a surveyor rather than to a spreadsheet inherited from the last agent. Ask for the schedule of elements, the assumed remaining lives, the cost basis and the inflation assumption, then check the reserve wording in a sample lease from each schedule before you change the figure. Plymouth Block Management works this way with boards across Devon and Cornwall, holding client money in named Lloyds accounts, one per managed property, with interest retained by the client: our page on service charge financial management explains how those accounts are run.

Common Questions

The questions directors and leaseholders ask most often about reserve funds, answered briefly.