IIP Trust & Payment of Building Insurance

Trusts Discussion
1

I have a qualifying interest in possession trust which holds a freehold property which was let for a time and the cost of buildings insurance formed part of the calculation of net Property Income. This income was collected by the trustees, basic rate tax was paid and the net income paid over to the life tenant.

Then the property ceased to be let and the life tenant moved in and occupied the property under the terms of the trust.

The trustees do not have a huge amount of capital cash and interest on it is small - but it covers the building insurance.

According to the trust deed, the trustees may insure the property and pay the premium from Capital or Income, as may be appropriate.

I am trying to decide the meaning of “as may be appropriate” - whether this is likely to be in practical terms or in general trust law terms as being properly chargeable to income.

My understanding of the rules are that being an IIP, if the trust deed allows the trustees to deduct the building insurance from Income (even though this is a freehold property which is not being let), then it is an allowable TME nevertheless and the life tenant will be subject to tax on the grossed up income (interest) after TMEs.

The trustees want to use the life tenant’s income to pay the buildings insurance because the life tenant is a higher rate tax payer who does not need the income and it will preserve the Capital cash.

Any thoughts would be welcome.

Colette Gill

2

Under trust law building insurance is payable from capital

Simon Northcott

3

Yes, it does. But does that mean the trustees cannot deduct it from Income given the wording in the trust deed? Does the trust deed wording mean that only those expenses properly chargeable to Income can be deducted from Income (i.e. Income in trust law) or does it mean that the trustees can deduct Capital expenses from Income (i.e. buildings insurance) if they deem it appropriate purely on practical grounds (e.g. not enough Capital cash or life tenant does not need the Income). This is the gist of my query - what do the words “as appropriate” mean - as appropriate in general trust law or as appropriate in practical or other terms…?

Colette Gill

4

Appropriate in the circumstances, even if it is normally a capital expense. So the trustees must take a view. If there is insufficient capital cash and no liquid assets it would certainly be appropriate. Preserving capital would not of itself in isolation be a reason, it would have to be balanced with other factors, ensuring a proper balance is maintained between capital and income.

Simon Northcott