Splitting the bill - Apportioning trustee management expenses
Sharing the burden of trust expenses is not a simple matter of apportioning them between income and capital beneficiaries. Fortunately, case law provides certain rules in the context of general trust law and the interpretation of the taxing statutes (which separately deal with the question of deductibility of expenses for tax purposes).
General trust law
In Re Bennett  1 Ch 778, the terms of an interest-bearing loan agreement made in the deceased’s lifetime provided for an annual inspection of the books and stock of a wine and spirit merchant by way of assurance the business would remain solvent. Rejecting the argument that such expenses should be treated as annual outgoings payable out of income, the Court of Appeal found they came under the head of costs, charges and expenses properly incurred by the trustees ‘for the benefit of the estate as a whole’. The purpose was as much to ensure the repayment of the capital sum as to safeguard the income of the life tenant. The expense, if borne by capital, would be borne by all of those entitled because less capital would remain to generate income.
This approach was upheld in Carver v Duncan  STC 356, where two issues were addressed:
- the trust law question whether expenditure was to be met by income or capital; and
- the tax law question of the deductibility of expenses, generally referred to as ‘trust management expenses’ (TMEs) in calculating the income chargeable to what are now the special trust rates in s479 Income Tax Act 2007 (ITA 2007).
Capital, said Lord Templeman in Carver, ‘must bear all costs, charges and expenses incurred for the benefit of the whole estate’. While the general rule in trust law is that income ‘must bear all ordinary outgoings of a recurring nature’, the fact that an expense is recurrent does not necessarily mean it is of an income nature. The annual life insurance premiums in Carver were ‘a recurrent charge but not an ordinary outgoing’, and remained capital in nature. There is no suggestion in Re Bennett or Carver that expenses incurred for the benefit of the whole estate should be apportioned into income and capital elements under general trust law.
Capital, said Lord Templeman, ‘must bear all costs, charges and expenses incurred for the benefit of the whole estate
Even if income is affected, as where investments are managed by professionals and their advice affects the future income yield, as well as the return on capital, the advisor’s fees remain chargeable to capital because they are for the benefit of both income and capital.
The trust deed may give the trustees discretion to allocate expenses as they see fit, or may provide for a specific allocation of certain expenses. However, this will not flow through to the tax treatment of accumulation and discretionary trusts, as explained below.
HMRC v Trustees of the Peter Clay Discretionary Trust  STC 469 clarified three points:
- trustees’ fees are an expense of the trust and a TME for tax purposes;
- if an expense is incurred for the benefit of the whole estate/trust, it is chargeable to capital (clearing up an ambiguity in Carver); and
- evidence such as an itemised invoice or time records can support an apportionment of an expense, but apportionment cannot be made with a view to achieving fairness without the costs relating to income being identifiable.
HMRC’s HS392 (the helpsheet) provides useful guidance on TMEs and sets out how the tax legislation is applied to different trusts. In the case of accumulation and discretionary trusts:
- TMEs are only taken into account in calculating how much trustees’ income is chargeable at the special trust rates.
- Only expenses properly chargeable to income in general trust law are allowed, ignoring any provisions in the trust deed.1
In the case of interest in possession trusts:
- TMEs do not reduce the trustees’ taxable income and are taken into account only in arriving at the income of the income beneficiary.2
- In contrast to accumulation or discretionary trusts, the provisions of the trust deed are taken into account.
As for mixed trusts:
- Trustees need to make a just and reasonable apportionment of TMEs between the income chargeable at the special trust rates and the income of income beneficiaries.
The helpsheet also includes a useful reference table outlining the treatment of specific items.
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