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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 for income tax purposes: what expenses are allowed: specific items: interest: general

Interest may have been incurred in the course of a trade or rental business and already allowed as a deduction against trading or rental income. It cannot be allowed again as a TME.

As a separate matter, some interest may be incurred as a TME. The general TMEs principles in Clay apply: to be allowable, the purpose or object of the interest must be to confer benefit exclusively on the income beneficiaries. Illustrations of the general principles are as follows.

If interest is paid on a loan taken out in order to purchase an income-bearing asset for the trust, that interest is potentially an allowable TME, as it will confer benefit exclusively on the income beneficiaries. But if a loan is taken out or overdraft arranged to pay for general administration, or to buy a non-income generating asset for the trust, or for an asset that is to be sold, that is not an expense paid to confer benefit on the income beneficiaries.

If the trustees incur interest on taking out a loan, and use the loan to make a gift or a non-interest bearing loan to a third party (not an income beneficiary of the trust), the interest incurred by the trustees would not be an allowable TME. Or if the trustees passed the loan on to someone else such as a company owned by the trustees, that would not meet the test, as the interest incurred by the trustees would not be an expense incurred exclusively for the benefit of the income beneficiaries of the trust.

Interest on a loan taken out to pay Inheritance Tax is not exclusively for the benefit of the income beneficiaries and so is not allowable.

Allowable interest includes:

  • interest on a loan or overdraft to purchase an income-producing asset, such as shares
  • interest on a loan or overdraft taken out by trustees for acquiring property that is occupied by a beneficiary

Interest on overdue bills - whether this is allowable depends on what the bill is for, and the general Clay principles apply. See also TSEM8735 about interest on tax bills.

Refer any queries about interest as an allowable TME to HMRC Trusts & Estates Technical Bootle.