Leasehold Guide
Accounting for Service Charges
Service charge accounts answer one question: what was collected, what was spent, and where is the difference. This guide explains how those accounts are put together and what directors and leaseholders should expect to see.
Service charge money is held in trust
Service charge contributions from leaseholders are trust monies. They must be held in a designated client or trust account, separate from the managing agent's own money, and can only be spent on the purposes the lease permits.
That has a practical consequence: the service charge is not income for the freeholder or the agent, and it does not belong on their balance sheet. It belongs to the leaseholders collectively, held for the building.
The annual cycle
The financial year runs to whatever date the lease specifies. Working backwards from that date, a well-run building follows the same rhythm every year.
- Budget: an estimate of the year's costs, line by line, issued to leaseholders before the year begins
- Demands: each leaseholder's apportioned share, demanded in the instalments the lease sets out
- Ledger: actual expenditure recorded against each budget line through the year
- Year-end accounts: actual income and expenditure, arrears, and the closing balance on the reserve fund
- Certification: independent examination or audit of the accounts, where required by the lease
- Reconciliation: any surplus credited or deficit demanded as a balancing charge
Service charge accounting questions
What is the difference between service charge accounts and company accounts?
They are two separate documents. Service charge accounts report the trust money collected and spent on running the building. Company accounts report the financial position of the resident management company itself as a legal entity, and are what gets filed at Companies House. A building with an RMC needs both, and the figures in them will not match.
Do service charge accounts have to be audited?
It depends on the lease. Many leases require the accounts to be certified by an accountant rather than fully audited. Where the lease is silent, an independent examination is still good practice because it gives leaseholders confidence in the figures.
What happens to a year-end surplus?
It is usually either credited against each leaseholder's next demand or transferred to the reserve fund, depending on what the lease permits. It should not simply disappear into a general pot.
How are arrears handled in the accounts?
Arrears are shown separately from expenditure. They matter because unpaid charges reduce the cash available to run the building — paying leaseholders end up funding the shortfall until arrears are recovered.
Related pages
- Leasehold Service ChargesWhat a leasehold service charge covers, how budgets and reserve funds are set, when charges can be challenged, and what a managing agent should provide each year.
- Section 20 ConsultationSection 20 of the Landlord and Tenant Act 1985 sets out consultation for major works. Learn the £250 and £100 thresholds, the notice stages and what happens without consultation.
- Residential Estate ManagementSpecialists in residential estate management for private estates, Residents' Management Companies and communal developments. We don't just administer estates. We manage them.
Want your service charge accounts reviewed?
We prepare and explain service charge accounts for the developments we manage, and we are happy to talk through yours.