Q&A - Sinking Fund

ANSWER

The area surrounding the ownership and control of a service charge fund is quite a detailed one, I have provided a response that should give you the answers generally to the questions, but further clarification should be sought as outlined.

The sinking fund is a service charge and although it is normally administrated by a landlord or management company the actual ownership or entitlement is normally outlined in the terms of the respective lease.

Statute also assists and under Section 42 of the  Landlord and Tenant Act 1987, it imposes a statutory trust whereby the monies are held on trust for the leaseholders to be used to pay for the services at the development, the same principle applies to a sinking funds.

Therefore in answer to the first part of your question (providing that the leases hold the common terms), the leaseholders are the owners of the service charge and the landlord holds the funds on trust to be used for payment of liabilities incurred by the service charge such as major works.

To be clear I am not a tax specialist and therefore it is difficult for me to answer specifically on the tax issues, but I can say that ordinarily the service charge is not a taxable income but there are certain exceptions to sinking funds due to the nature of them.

The treatment of the funds will be decided by the nature of which they are held. If they are part of a trust as described above then HM Revenue and Customs treat receipts as capital. Investment income is chargeable in the hands of the trustee at special rates applicable to trusts. If however the funds are part of the general funds of the landlord it is taxed as the landlords income.

Again the lease will likely have some direction on the tax liabilities incurred as result of the provision of services.

Ultimately you need to check the lease and see if the funds are held on trust or held by the landlord, this will then assist with the tax implications.

I hope this helps and please don’t hesitate to contact LMP Law so that we can review your lease and be in a better position to answer in detail.

Peter Cornell, Director at LMP Law