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HMRC internal manual

Trusts, Settlements and Estates Manual

Trust management expenses: accumulation/discretionary trusts: difference between trust law and ITA/S484

Expenses that are income expenses for trust law are not necessarily income expenses that are allowable for ITA/S484.

First, an expense that is capital in general law may be charged to income because the trust instrument authorised the trustees to put the final burden of the expense on the income fund. However, ITA/S484 directs that what the trust instrument has to say about the incidence of a particular expense should be ignored.

Secondly, some trust law income expenses may have already been allowed elsewhere in the tax calculation before ITA/S484 is applied. For example, the trustees may pay rates on a rental property. Carver v Duncan says that ‘rates’ are income expenses for trust law purposes. But they are already taken out of the charge to the special trust rates by provisions associated with rental income. The sum used to defray these expenses is not brought into charge for the special trust rates at all, and as such is incapable of being an expense for the purpose of ITA/S484.

Thirdly, some expenses may be income expenses as a matter of trust law but cannot be allowable for tax purposes on general tax law principles. For example, Carver v Duncan says that ‘taxes’ are an income expense in trust law. But taxes are not a deduction in arriving at tax liability, and so not allowable for ITA/S484.