Revenue & Customs Commissioners v Trustees of Peter Clay Discretionary Trust (2008)
Under the general law, expenses incurred for the benefit of both the income and capital beneficiaries of a trust had to be charged against capital. It was only those expenses which were incurred exclusively for the benefit of the income beneficiaries that could be charged against income. Fees of trustees calculated on a time basis and fixed fees could be apportioned to the extent that it could be shown that the fees were referable to matters which were exclusively for the benefit of income.
The appellant trustees (P) appealed against a decision ((2007) EWHC 2661 (Ch), (2008) Ch 291) that certain fees and remuneration were not chargeable to income. The respondent commissioners in a closure notice disallowed the attribution in part to income in the year 2000-01 of certain expenses incurred by P as the trustees of a United Kingdom resident discretionary trust. The effect of the Income and Corporation Taxes Act 1988 s.686(2AA) was that, to the extent that income had been applied in defraying expenses which were properly chargeable to income, that income did not suffer tax at the higher rates applicable to the income of accumulation and discretionary trusts. P contended that, where a particular expense of managing the trust related partly to income, that expense could and should be apportioned fairly between income and capital; so that part was attributed to income. The commissioners contended that apportionment between capital and income was not permissible in such a case: an expense which related partly to income and partly to capital was to be charged wholly to capital. The Special Commissioners ruled in favour of P in respect of trustees' fees, bank charges, custodian fees and professional fees for accountancy and administration, but held that no part of the fixed fee payable to non-executive trustees or of investment management fees was attributable to income. The judge allowed the commissioners' appeal in respect of the attribution of expenses to income and dismissed P's cross-appeal in respect of investment management fees and the fixed fee payable to non-executive trustees. P submitted that the judge was in error in failing to recognise that trustees' fees and remuneration were in part incurred not for the benefit of capital but for the distinct benefit of income and that accordingly part of the burden of such fees and remuneration, not being incurred for the benefit of the whole estate, should be charged to income.
(1) An expense was incurred "for the benefit of the whole estate" when the purpose or object for which that expense was incurred was to confer benefit both on the income beneficiaries and on those entitled to capital on the determination of the income trusts. The expression "expenses incurred for the benefit of the whole estate" had to be understood in that sense. Expenses which were of that nature were to be charged against capital, Bennett, Re (1896) 1 Ch 778 CA and Carver v Duncan (Inspector of Taxes) (1985) AC 1082 HL applied. It followed that it was not open to the Special Commissioners to approach their task on the basis that, in the light of the general principle of fairness, expenses incurred for the benefit of the whole estate should not be understood widely as meaning that anything that was for the benefit of both the income and capital beneficiaries should be charged to capital and should not be attributed. The judge was correct to hold that the Special Commissioners had erred in law in that respect. They were required to accept that, under the general law, expenses incurred for the benefit of both the income and capital beneficiaries had to be charged against capital. It was only those expenses which were incurred exclusively for the benefit of the income beneficiaries that could be charged against income. (2) The commissioners rightly accepted that the executive trustee's fees, calculated on a time basis, could be apportioned, on a time basis, between fees attributable to dealing with the income of the trust fund and fees attributable to dealing with the capital of the fund. To that extent the appeal was allowed, so as to permit apportionment of the executive trustee's fee as well as the bank charges, custodian fees and professional fees for accountancy and administration. (3) The Special Commissioners erred in concluding that the fact that the fee paid to the non-executive trustees was fixed in amount was sufficient to preclude apportionment. The non-executive trustees could be called on within their retainer to give advice exclusively for the benefit of income beneficiaries. The onus of showing that some of the fees of the non-executive trustees related to advice for the exclusive benefit of income beneficiaries rested on the trustees. (4) In relation to the investment advisers' fees, the Special Commissioners were right that once P had resolved to accumulate the income, the moneys to be accumulated ought properly to be regarded as capital; so that the expenses incurred in connection with the investment of those moneys could not be said to be chargeable to income. The position would be otherwise if the trustees were temporarily investing income before distributing it but that was not suggested in the instant case.
Appeal allowed in part