Trust money (section 42)

Whoever receives the service charge (the landlord, a residents' management company or an RTM company) holds it as a trustee (s.42). That has practical consequences for directors.

What it means day to day

• Keep it separate. Hold service-charge money (and any reserve) in a bank account in the company's name used only for that purpose. Don't mix it with the company's own income, such as fees for consents.
• Use it only for its purpose: the costs the service charge pays for under the leases.
• Interest belongs to the trust, not to the company.
• If management changes, the money goes to the new manager (for the right to manage, see accrued uncommitted service chargesAccrued uncommitted service chargesThe service-charge money held by the outgoing landlord or managing agent on the RTM acquisition date, less what is needed for costs already incurred, which must be paid over to the RTM company.).

Tax

HMRC treats service charges held on trust as outside the company's corporation tax, because the company isn't beneficially entitled to them. Interest earned on the trust money can be taxable as trust income: from April 2024, trust income up to £500 in a tax year doesn't need reporting, but above that the whole amount is taxable. Ask an accountant if you're near the limit.