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HMRC internal manual

Trusts, Settlements and Estates Manual

Trust management expenses: IIP trusts: IIP beneficiaries: ITA/S500: basis of allowance

ITA/S500(1)(a) provides that allowable TMEs are allowed on the ‘incurred’ basis. So the beneficiary’s entitlement in any tax year is income arising less allowable TMEs incurred.

S500 provides for unused allowable TMEs incurred in an earlier year to be used against the current tax year. In a year where allowable TMEs incurred exceed income arising the beneficiary’s income entitlement will be nil. The excess allowable TMEs will be taken into account in later year/s.

For an expense to be properly chargeable to income in trust law the trustees must have authority to put the final burden of that expense on the income fund. Which fund they use to pay it out of temporarily is not relevant.

In a year where there is not enough income, trustees may borrow from capital to pay income expenses, and in the next year reimburse capital from income.

If an expense is properly chargeable to income, but the trustees pay all or part of it from trust capital in year 1 because there is no income or not enough income that year, the beneficiary’s net income in year 1 will be reduced to nil. If in year 2 the trustees reimburse capital from income, that amount will be allowable against the beneficiary’s income for tax purposes in year 2.


Year 1, trust income £1,000, allowable TMEs £2,000.

Trustees pay £1,000 TMEs out of income, and £1,000 out of capital. Beneficiary’s taxable income £1,000 less TMEs £1,000 = nil.

Year 2, trust income £3,000, allowable TMEs £1,000.

Trustees pay £1,000 TMEs of current year out of income, and reimburse capital £1,000 for income expenses of previous year. Beneficiary’s taxable income £3,000 less £2,000 = £1,000.