---
title: "Reserve Funds (Sinking Funds): How Much a Block Should Hold and Who Decides"
url: https://manage.management/blog/reserve-funds-sinking-funds-how-much-a-block-should-hold-and-who-decides
description: "Sinking funds explained: when the lease allows one, how much a block should hold, who decides, section 42 trusts, the RICS Code and how to challenge it."
author: "Franklin Baeza"
published: 2026-11-03T06:33:57.000Z
updated: 2026-11-03T07:37:21Z
categories: ["Service Charges","Governance & Compliance"]
publisher: Manage.Management
language: en-GB
---

# Reserve Funds (Sinking Funds): How Much a Block Should Hold and Who Decides

Sinking funds explained: when the lease allows one, how much a block should hold, who decides, section 42 trusts, the RICS Code and how to challenge it.

A reserve fund, also called a sinking fund, is money collected through the service charge and set aside for large future costs such as roof replacement, lift renewal or external redecoration. A block can only collect one if the lease allows it. The amount should be based on a costed long-term planned maintenance plan, it must be reasonable under section 19(2) of the Landlord and Tenant Act 1985, and the money is held on statutory trust for the leaseholders under section 42 of the Landlord and Tenant Act 1987. The landlord, RMC or RTM company sets the contribution through the annual budget, and leaseholders can challenge it at the First-tier Tribunal.

Reserve funds are one of the most argued-about lines in any service charge budget. Too little, and leaseholders face a sudden five-figure bill when the roof fails. Too much, and people who sell in a few years feel they have paid for works they will never benefit from. This guide explains what the law says, how much a block should hold, who decides, and how resident directors can set a figure they can defend.

> This article is general information about leasehold buildings in England and Wales, not legal advice. What you can collect depends on the wording of your lease, so check it, or take advice, before changing your reserve fund policy.

## Key takeaways

- A reserve fund can only be collected if the lease allows the landlord to collect or retain service charge money for future costs.
- The RICS Service Charge Residential Management Code (4th edition), in force since 7 April 2026, says every building should have a costed long-term planned preventive maintenance (PPM) plan, and reserve contributions should be based on it.
- Advance contributions must be no more than is reasonable (s.19(2) Landlord and Tenant Act 1985), and leaseholders can ask the tribunal to decide.
- Reserve money is held on statutory trust for leaseholders (s.42 Landlord and Tenant Act 1987). It is not refunded when you sell your flat.
- Reserve funds should not be used to cover day-to-day costs or arrears, other than for very short-term cash flow problems that are quickly repaid.
- If the lease has no reserve fund clause, the leases can be varied by the tribunal with enough support from leaseholders (s.37 Landlord and Tenant Act 1987).

## What is the difference between a reserve fund and a sinking fund?

In residential blocks, there is no practical difference. The [RICS Service Charge Residential Management Code](https://www.rics.org/profession-standards/rics-standards-and-guidance/sector-standards/real-estate-standards/service-charge-residential-management-code) defines a reserve or sinking fund as "a provision for future major expenditure" and notes that "these terms have become interchangeable over recent years". The Code uses "reserve fund".

What does matter is the difference between a reserve fund and a contingency. The Code describes a contingency as an allowance for unforeseen day-to-day costs, such as an emergency repair, while a reserve fund is for planned major expenditure. Mixing the two is one of the most common reasons budgets are challenged.

## Can a block collect a reserve fund if the lease does not mention one?

Only if the lease, read as a whole, allows service charge money to be collected or kept for future costs. The Code says leases "may not specifically include such terms as reserve fund or sinking fund but may still provide for service charge income to be retained towards costs to be incurred in future years". The test is the wording, not the label.

Where the lease says the landlord "must" set up a fund, it must. The Code warns that failing to hold one when the lease requires it "could be deemed to be a breach of the terms of the lease". Where there is no power at all, the Code says landlords should consider asking leaseholders to support an application to the tribunal to vary the leases, and otherwise make leaseholders "fully aware of the future service charge cost implications" so they can save privately.

## How much should a block hold in its reserve fund?

There is no statutory figure or percentage. The right amount is whatever is needed, spread fairly over time, to pay for the major works your building will need. The Code says "all buildings should have a costed long-term planned preventative maintenance (PPM) plan that reflects the age and condition of the building", and "the level of reserve fund collections should be informed by the PPM plan".

The Code's guidance on how to work this out:

| Type of building | Basis for the reserve calculation |
| --- | --- |
| Simple schemes, such as a small converted house or low-rise block | The age and condition of the building and likely future cost estimates |
| More complicated developments, such as blocks with lifts, plant or large estates | A comprehensive stock condition survey and a life cycle costing exercise by appropriate professionals |
| Housing associations, councils and large landlords | Long-term, stock-wide investment plans, applied at building or estate level |

Contributions should be reviewed every year as part of the budget, with the underlying survey refreshed at intervals that suit the building's age and complexity. Our guide to [planned preventive maintenance](https://manage.management/blog/planned-preventive-maintenance-a-guide-for-leasehold-blocks) explains how to build the plan itself.

A simple illustration: if a 20-flat block expects to replace its lift in 15 years at an estimated £120,000, it would need to set aside £8,000 a year, or £400 per flat if costs are shared equally. Real plans adjust for inflation, interest, existing balances and the lease's apportionment, but the principle is the same: spread the cost across everyone who uses the building over its life.

## Who decides the reserve fund contribution?

Whoever sets the service charge under the lease. That is usually the landlord or its managing agent, or the board of a residents' management company (RMC) or Right to Manage (RTM) company where one manages the building. The contribution goes into the annual budget alongside day-to-day costs.

Decisions are not unlimited. [Section 19(2) of the Landlord and Tenant Act 1985](https://www.legislation.gov.uk/ukpga/1985/70/section/19) provides that where a service charge is payable before costs are incurred, "no greater amount than is reasonable is so payable". A leaseholder who thinks the reserve contribution is too high, or not justified by the lease, can apply to the First-tier Tribunal (Property Chamber). Our guide to [how service charge budgets are set](https://manage.management/blog/how-service-charge-budgets-are-set-and-what-leaseholders-can-do-if-they-have-questions) covers the budget process in detail.

For resident directors, the best defence of a reserve figure is evidence: a current PPM plan, recent cost estimates, a board minute recording the decision, and a clear explanation sent to leaseholders with the budget. The Code says the PPM and projected reserve contributions "should be made available to all leaseholders on request and to any prospective purchasers upon resale".

## How must reserve fund money be held?

As trust money, separate from everyone else's. Under [section 42 of the Landlord and Tenant Act 1987](https://www.legislation.gov.uk/ukpga/1987/31/section/42), service charge contributions, investments and interest are held on trust to pay for the costs they were collected for, and subject to that, for the contributing leaseholders.

The Code adds practical expectations:

1. **Keep it separate.** Service charge money must be kept apart from the landlord's and managing agent's own money, and money for one building must never fund another.
2. **Hold reserves in their own account.** The Code calls it best practice to keep reserve funds and day-to-day money in separate accounts.
3. **Earn interest.** Trustees should invest funds not needed day to day, in authorised deposit accounts. The Code expects leaseholders to be told the bank, account name, sort code, whether it pays interest, and any withdrawal restrictions.
4. **Do not raid it.** Reserve funds should not subsidise day-to-day spending or cover non-payment, other than very short-term cash flow difficulties, and must then be repaid "in full, at the earliest opportunity".
5. **Report it.** Year-end accounts should include a statement of reserves showing contributions, spending, interest and the closing balance.

Section 42 does not apply to "exempt landlords" such as councils and housing associations, although the Code still expects their reserves to be separately identifiable. From 1 November 2027, the new standardised service charge accounts under the Leasehold and Freehold Reform Act 2024 will include sinking fund details, as covered in our post on the [confirmed leasehold reform timetable](https://manage.management/blog/leasehold-reform-timetable-confirmed-service-charge-insurance-and-legal-cost-changes-from-2027).

## Do I get my reserve contributions back when I sell?

No. Section 42(6) says that when a leaseholder's lease ends they are not entitled to any part of the trust fund, and the money stays held for the building. The Code confirms that reserve money "should not be distributed to the leaseholders when the lease is assigned", unless the lease says otherwise.

That is why a healthy reserve fund usually helps a sale. Buyers' conveyancers ask about reserve balances and planned works. A building with a credible plan and a funded reserve looks far less risky than one facing an unfunded major works bill.

## Does a reserve fund replace section 20 consultation?

No. If works from the reserve fund are qualifying works costing any leaseholder more than £250, the landlord or RMC still has to consult under section 20 of the Landlord and Tenant Act 1985. Having the money already in the bank does not remove that duty. See our [step-by-step section 20 consultation checklist](https://manage.management/blog/section-20-consultation-a-step-by-step-checklist-for-blocks).

## What if our lease does not allow a reserve fund?

The leases can be changed. Under [section 37 of the Landlord and Tenant Act 1987](https://www.legislation.gov.uk/ukpga/1987/31/section/37), the landlord or any leaseholder can ask the tribunal to vary several leases at once where the aim "cannot be satisfactorily achieved unless all the leases are varied to the same effect". The application needs:

- for fewer than nine leases, the consent of all, or all but one, of the parties; or
- for more than eight leases, the consent of at least 75% of the parties, with no more than 10% opposing.

The landlord counts as one of the parties. In share-of-freehold blocks and RMCs, where leaseholders are also the landlord, reaching agreement is often easier than people expect.

## How Manage.Management helps

Manage.Management helps resident directors turn a reserve fund from a number in a spreadsheet into something leaseholders can see and trust. Directors can store the PPM plan and survey reports in the building's document library, show reserve balances and contributions alongside the service charge budget, and track planned works against their target dates. When leaseholders or buyers ask why the contribution is what it is, the evidence is already there.

## Frequently asked questions

### Is a sinking fund compulsory for blocks of flats?

Not by statute. It is compulsory only if the lease requires one. The RICS Code calls it good practice to hold reserve funds where leases permit, and expects every building to have a costed long-term maintenance plan.

### Can the RMC use the reserve fund to cover unpaid service charges?

It should not. The RICS Code says reserve funds should not be used to make up non-payment by leaseholders or landlords, other than for very short-term cash flow difficulties where the money is repaid to the reserve in full at the earliest opportunity. Our guide to [service charge arrears](https://manage.management/blog/service-charge-arrears-what-happens-and-how-to-prevent-them) covers recovery options.

### Can I challenge a reserve fund contribution?

Yes. You can ask the First-tier Tribunal (Property Chamber) to decide whether an advance service charge, including a reserve contribution, is payable and reasonable. Ask for the PPM plan and the reasoning behind the figure first, because many disputes are resolved once the evidence is shared.

### Is interest earned on the reserve fund taxable?

Interest on service charge trust money forms part of the trust fund, and it may be taxable. The tax treatment depends on how the funds are held and who holds them, so ask the building's accountant to confirm the position each year.

### How often should the reserve fund be reviewed?

Every year as part of the budget, according to the RICS Code, with the underlying condition survey or life cycle costing reviewed at intervals that reflect the building's age, complexity and the size of the fund.

## A reserve fund is a promise to future residents

A well-run reserve fund is one of the clearest signs of a well-run building. It means nobody is hit with a surprise bill, nobody pays for more than their fair share, and the people who live in the block can see exactly what their money is being saved for. Start with the lease, build the plan, and explain the figure every year.

Last reviewed: 3 November 2026 by Franklin Baeza, Manage.Management. This article is general information for England and Wales, not legal advice. Check the current position with a qualified adviser before acting.

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Source: [Reserve Funds (Sinking Funds): How Much a Block Should Hold and Who Decides](https://manage.management/blog/reserve-funds-sinking-funds-how-much-a-block-should-hold-and-who-decides) on the Manage.Management blog.