Ignoring the general deductibility of interest against income, it would appear that the only “special” interest deduction afforded to PRs when calculating the charge to tax upon estate income is that given by s.404 ITA2007 in respect of interest payable in the first twelve months against a loan to pay IHT.
When calculating the residuary income of beneficiaries with an absolute interest, i believe that s.666 ITTOIA2005 would appear to allow, amongst other things, all interest paid by the PRs to be deducted – here, this interest would merely serve to reduce the beneficiaries’ deemed share of the estate income.
Interest paid by discretionary trustees and PRs reduces the amount of trust income and estate income taxable on the beneficiaries, on the stunningly simple basis that you cannot distribute what you have not got. But the trust/basic rate of income tax is applied to the gross income received without any deduction for interest (save in the case you mention for PRs and also where the income is deductible in arriving at trading or, partially, rental profits). So the net result is that beneficiaries obtain in effect a deduction on the same simple basis that they are only taxed on what they receive.
Where the settlor is taxable on the income under the settlement rules or a life tenant on the arising basis they do not get the effective deduction because they are taxed on the trustees’ gross income not on what they receive. The settlor can recover from the trustees any tax payable (on the basis that it is the trustees/beneficiaries’ income save only for tax purposes) and the trustees can mandate the income to a life tenant to avoid having to pay basic rate tax before handing the net income over to the life tenant to pay any further tax or claim a refund.