I have a life interest trust which, amongst other assets, includes an investment portfolio. The investment adviser charges a fee determined by the performance of the portfolio value.
For income tax purposes, these fees are not deductible as Trust Management Expenses, as they are not incurred solely for the benefit of the income beneficiaries, and there is no discernible proportion that can be said to be for income.
Historically however, these fees have been deducted in the trust accounts in determining the income due to the life tenant. I have briefly read the HMRC guidance, including the Carver v Duncan and Clay case summaries. I believe that these cases, whilst focussed on the tax treatment, also point to the correct accounting treatment of these fees. A colleague however disagrees.
Does anyone have any guidance on whether these costs can still be included for accounting purposes, or should they be allocated to capital?
Whiting & Partners
Whether or not an expense is allowable in reducing the amount of income due to a life tenant depends on both general trust law and the provisions of the trust deed as to whether the trustees are able to charge specific expenses to income or capital.
HMRC’s manuals have some helpful explanations. In your example, while investment fees are generally considered to be capital in nature, and would not be allowable as a deduction for income tax purposes as trust management fees against discretionary income, if the deeds allows expenses to be charged to income they can be so charged as a deduction against the life tenant’s entitlement.
See https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem8335 for further information.
Stevens & Bolton
I understand that the Court of Appeal’s decision in HMRC v. Trustees of the Peter Clay Discretionary Trust (https://www.bailii.org/ew/cases/EWCA/Civ/2008/1441.html) is effectively a statement of trust law, and not merely identifying those expenses which might be allowed for income tax purposes.
Subject to the point raised by Duncan McGowan – that the above might be varied by the terms of the trust instrument – a review of the judgment might be instructive.
I agree with Duncan, we do not deduct them for tax purposes, really only deducting the cost of preparing the accounts (not the tax return) but do allow relief for accounting purposes and reducing the payment to the life tenant.
Lambert Chapman LLP
Many thanks to you both.
Whiting & Partners