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HMRC internal manual

Trusts, Settlements and Estates Manual

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HM Revenue & Customs
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Trust management expenses: IIP trusts: IIP beneficiaries: tax law: ITA/S500

ITA/S500 Restrictions on use of trustees’ expenses to reduce the beneficiary’s income.

S500 provides that if, as a result of the expense being chargeable to income it reduces the beneficiary’s entitlement to income, it reduces the measure of the beneficiary’s income for tax purposes.

An expense can reduce the beneficiary’s entitlement in two ways:

  • If it is chargeable to income under general trust law and there is no specific provision about the expense in the trust deed.
  • If it is chargeable to income under the trust deed, whether it is chargeable to income or capital in general trust law.

In cases where general trust law would require an expense to be charged to income, but the trust deed charges it to capital, the expense is not allowable, as it does not reduce the beneficiary’s entitlement to income.

In sum:

  • if an expense is properly chargeable to capital in general trust law, but charged to income under the trust deed, the expense is allowed;
  • if an expense is properly chargeable to income in general trust law, but charged to capital under the trust deed, the expense is not allowed.

The legislation for interest in possession trusts specifies that one must give priority to the provisions of the trust deed over general trust law when establishing whether the expense is an allowable trust management expense for tax purposes. In practical terms the provisions result in the IIP beneficiary being taxed on his or her entitlement to income.