TSEM5720 | Trusts for particular purposes: flat management companies - funds created

Typically there are two main types of fund to which Section 42 LTA 1987 applies.

Sinking Funds

Sinking Funds involve the long term setting aside of funds for major repairs and renewals. Over a period, the fund can grow to a significant size and generate substantial investment income.

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Service Charge Funds

Service Charge Funds are funds where the intention is to cover only the routine day to day costs of maintaining the communal areas and paying for minor repairs and decorations. The service charges are reviewed annually and set at a level to balance the actual expenditure and leave a ‘no surplus - no deficit’ situation at the end of each year. In practice there may be a small amount held in reserve or carried over from the previous year. The trust will not accumulate any surplus charges or create any sort of contingency or sinking fund. Any investment income is derived only from the short-term deposit of temporarily surplus funds.

Some trusts will act both as a sinking fund and as a service charge fund, although usually the trustees would keep the two funds separate.

There are a number of different situations in which sinking funds or service charge funds may be created. Not all of these will necessarily fall within the scope of Section 42 LTA 1987.