What is a Sinking Fund?

If you’ve ever owned a leasehold flat or been part of a residents’ management company, you might have heard the term ‘sinking fund’ thrown around. It sounds obscure, but it’s actually a very practical part of managing buildings and long-term costs.

So, what is a sinking fund, what are sinking funds used for and how do sinking funds work in practice? Here’s what you need to know.

What is a sinking fund?

A sinking fund is a pot of money that’s set aside gradually to cover future big expenses. In property, that usually means things like roof replacements, structural repairs or new lifts. These are jobs that don’t come up every year, but when they do, they cost a lot.

Instead of trying to raise thousands of pounds in one go when something breaks, the idea is to build the fund slowly so the money’s ready when it’s needed.

What are sinking funds used for?

Sinking funds are most common in blocks of flats or managed developments. If there’s a shared roof, stairwell or garden, it makes sense to plan for future costs together. A sinking fund helps spread those costs fairly between residents.

Common uses for a sinking fund include:

• Roof repairs or replacements
• External painting and re-rendering
• Replacing lifts or communal heating systems
• Window replacements in shared areas
• Major structural works
• Upgrading fire safety systems

It’s not for everyday maintenance. That’s what the regular service charge covers. The sinking fund is only used when something big needs doing and the cost goes beyond the annual budget.

How do sinking funds work?

The way a sinking fund works is fairly simple. Each year, leaseholders or residents pay a bit extra on top of their service charge. That money goes into a dedicated sinking fund account.

The fund builds up over time. Then, when large works are needed, the managing agent or freeholder can use the sinking fund to pay for them without asking leaseholders for a huge lump sum.

There’s usually a plan or survey that shows what works are likely to be needed in future and when. This helps set a reasonable target for the sinking fund. The idea is to avoid nasty surprises.

Who manages the fund?

The sinking fund is usually managed by the freeholder or a property management company. In some cases, a residents’ management company takes responsibility.

Legally, the money must be held in trust and used only for the benefit of the building. It can’t be spent on anything else and it can’t be pocketed by the managing agent.

A separate account should be kept, and residents are entitled to see a breakdown of what’s in the fund and how it’s being used. Transparency is key, and that applies to landlords selling a tenanted property making sure that their tenants and buyers are aware of any upcoming contributions.

Do all leasehold properties have a sinking fund?

No. Some leasehold buildings don’t have a sinking fund at all. Others might have one, but it’s too small to cover what’s needed. And some buildings run a reserve fund instead, which is similar but might be used for both planned and unplanned costs.

If there’s no sinking fund, or if the fund runs dry, leaseholders may be asked to pay a large one-off bill known as a ‘major works’ charge. This can be very expensive and hard to challenge.

Should you be worried about a sinking fund?

A healthy sinking fund is usually a good sign. It shows the building’s being managed properly and future costs are being planned for. That’s especially important if you’re buying a leasehold property.

Before you buy, your solicitor should ask for details of the sinking fund. You’ll want to know:

• Does one exist?
• How much is in it?
• What works are planned?
• Are there any upcoming major costs?

If the fund’s too low and big works are due, you could end up footing the bill. If the fund’s too high with no explanation, it might be worth challenging.

How much should be in a sinking fund?

There’s no fixed amount. It depends on the size, age and condition of the building. A small, modern block with few shared parts might not need much. An older building with a big roof, period features or a lift might need a lot more.

A building survey can help estimate the likely cost of major repairs over the next ten to twenty years. That figure is then used to work out how much each flat should contribute annually.

In general, expect to pay a few hundred pounds a year into a sinking fund as part of your service charge. It’s not wasted money. It’s there to protect you from a sudden five-figure bill.

What if the sinking fund is misused?

It’s rare, but it does happen. Funds should be held in trust and used only for genuine works. If you suspect the fund’s being mismanaged, you can:

• Ask for a full breakdown of accounts
• Check the lease to see what the fund can be used for
• Speak to other leaseholders
• Raise concerns with the managing agent
• Escalate to a tribunal if necessary

If you’re unhappy with the management of the sinking fund, you may also be able to take over management through Right to Manage (RTM) legislation.

Can you get your money back?

In most cases, no. If you sell your flat, your contributions to the sinking fund stay with the property. The new owner benefits from the fund you helped build.

That might feel unfair, but it works both ways. You might also buy a flat with a healthy fund that someone else has paid into.

Think of it as part of the long-term cost of maintaining the building. It’s not a savings account. It’s a shared safety net.

Can a lack of sinking fund affect your sale?

Sadly, yes. Buyers and mortgage lenders often want to see evidence of a sinking fund. If there’s no fund and expensive works are coming up, buyers may pull out or ask for a discount.

In some cases, you might need to reduce your asking price to reflect the expected costs. Or you may be asked to pay a retention fee to cover future works.

A well-managed sinking fund can help reassure buyers and smooth the sales process. It shows that the building is financially sound and well looked after.

How does a sinking fund differ from a reserve fund?

Some leases refer to a ‘reserve fund’ instead of a sinking fund. The terms are often used interchangeably, but there can be a difference.

A reserve fund might be used for both expected and unexpected costs, including emergency repairs. A sinking fund is usually more tightly defined and limited to planned works set out in advance.

A landlord or freeholder isn’t allowed to overcharge or use the fund inappropriately. There’s RICS guidance that sets out how charges should be calculated and disclosed.

Always check the lease to see how the fund is described, what it covers and how it’s calculated. The wording matters.

Thinking of selling a flat with no sinking fund?

If your flat has no sinking fund and you know big works are coming, it might put buyers off. That’s especially true if the building’s older or the lease is short.

You can try:

• Getting quotes for works and sharing them with buyers
• Offering to contribute to future costs
• Exploring cash house buyer options if mortgage buyers are hesitant

At Sell House Fast, we buy any house or flat for cash, including those with complex leasehold issues or no sinking fund. We can complete quickly and cover legal costs, helping you sell without the hassle.

Enter your postcode now to get a free, no-obligation offer and find out how much you could get. We’re here to help you move forward with confidence, and on your terms.