Introduction

If you own a flat in the UK, you’ve probably come across the words ‘service charge’ and ‘reserve fund’. These two things are part of everyday life in leasehold blocks, but they can feel a bit confusing. What’s the difference between them? Should they be kept apart? And what exactly can a reserve fund be used for? In this blog, we’ll break it down in plain language so it all makes a bit more sense.

What is a reserve fund in leasehold flats?

A reserve fund is like a rainy-day savings account for your building. Instead of waiting for a roof to leak or the lift to break and then asking everyone for a big lump sum, money is collected bit by bit through the service charges. This way, when major works are needed, the cash is already there.

Why do leasehold blocks need a reserve fund?

Without a reserve fund, leaseholders often face sudden large bills for major works. These can come as a real shock, especially in small blocks where the cost may be high, for example due to scaffolding and access costs and the burden is split between fewer people. A reserve fund makes things fairer and easier to budget for as it collects a little each year over a number of years so that there are no big bills around the corner.

Should the reserve fund be kept separate from day-to-day service charges?

Yes, reserve funds should. Day-to-day service charges cover things like cleaning, lighting, gardening, and insurance. The reserve fund is for the big stuff, like replacing windows, repainting the outside, or fixing the roof. Keeping them separate helps everyone see where the money is going and stops confusion.

What can a reserve fund be used for?

A reserve fund can be used for big repairs, major works, or replacement of things that are part of the building. Think new boilers, major electrical rewiring, or a big roof repair. It’s there to keep the building safe and in good condition.

A reserve fund isn’t a slush fund. Unless the lease or constitution allows it should not really be used for general running costs and overspends due to cashflow issues, but the reality it is often has to as how else would the service charge function.

Reserve funds are to maintain, repair and renew cyclical items of expenditure, caselaw dictates that this can mean renew, where replacement where the item is beyond repair. Save for where repair is not practical and renewal is required, service charges cannot be used for improvements, e.g., to replace an entryphone with a video entryphone or add a new gym or fancy extras. It’s about maintaining, not upgrading.

How can leaseholders keep track of the reserve fund?

Service charge accounts should set out the reserve funds held on the balance sheet, so leaseholders can see that their money is held in trust for future works. Leaseholders have the right to ask for details, and it’s important that everything is transparent. Some blocks even send out newsletters or hold meetings to update residents on the state of the reserve funds held, projects coming up and what collections are needed.

Understanding the difference between service charges and reserve funds helps make life in a leasehold block a lot less stressful. When the money is managed well, everyone benefits. And while no one enjoys paying service charges, knowing there’s a proper reserve fund in place gives peace of mind that the building will be looked after without nasty financial surprises.

No managing agent? No problem. ServiceChargeSorted.co.uk is built specifically for small flat developments, it gives you the tools to set your budget and reserves and collects the service charges for you. You set the budget, upload invoices, and we manage payments, the books, arrears recovery, year-end accounts, Companies House requirements, and online visibility into your block’s bank account. It’s that simple.