Trustees’ Expenses

The recent case of Clays Trustees v HMRC considered whether trustees could properly treat various expenses incurred in running a trust as income-related and therefore deductible for income tax purposes. The result would affect not only the overall tax payable but also the difficult balance trustees need to strike between the interests of those entitled to trust income and those eventually entitled to the trust capital.

HM Revenue and Customs guidance on trust management expenses states that trustees’ fees reflect work done in relation to both capital and income and therefore they ought to be paid out of capital. It also says that only ordinary outgoings of a recurrent nature are properly payable out of income and therefore deductible for income tax purposes.

In this case the fees included professional fees, bank charges and custodian fees as well as investment management fees, part of which Revenue and Customs had initially disallowed.

The trustees had argued that as some of the fees were incurred in generating income for the trust, they were rightly chargeable to income. The Special Commissioners decided that the important general principle was to achieve fairness between those beneficiaries entitled to income and those entitled to capital. In practice this meant that a proportion of all the expenses in issue, apart from the investment management fees, were attributable to income and therefore properly deductible for income tax purposes.

For further information on the new pension rules, please contact:

Mark Keenan
Tel +44 (0)20 7440 7129
mark.keenan@mishcon.com