Trust management expenses: ‘properly chargeable to income’ in general trust law: HMRC v Peter Clay: summary
The Court of Appeal decision in HMRC v Peter Clay is about whether any expense is properly chargeable to income or capital for the purposes of S686(2AA) ICTA 1988. That provision was rewritten as ITA/S484. The case looks closely at expenses in general trust law, on which tax law is based.
There are three categories of trust expenses:
- those incurred for the benefit of the estate as a whole, because they are incurred for the joint benefit of income and capital beneficiaries,
- those incurred for the benefit exclusively of income beneficiaries;
- those incurred for the benefit exclusively of capital beneficiaries
The Court of Appeal decision in HMRC v Peter Clay sets out explicitly how 1 and 2 are to be treated:
- Expenses for the benefit of the whole estate, where the purpose or object for which they are incurred is to confer benefit both on the income beneficiaries and on the capital beneficiaries. Such expenses are wholly chargeable to capital in general trust law. They cannot be charged to income, and they cannot be apportioned to income.
- Expenses that are exclusively for the benefit of the income beneficiaries, where the purpose or object of the expenses incurred is to confer benefit solely on the income beneficiaries. Such expenses are chargeable to income in general trust law.
- Implicitly, expenses incurred for the benefit exclusively of capital beneficiaries must be charged wholly to capital.
Clay also established that where an expense that is exclusively for income beneficiaries is not separately recorded, but the time related to these activities has been specifically recorded, the overall expense can be apportioned to income on a time basis. If there are no time records, the trustees can make a realistic estimate.