Revenue & Customs Commissioners v Trustees of the Peter Clay Discretionary Trust (2007)
To the extent that any particular expense of trustees was to be regarded as incurred for the benefit of the whole trust estate it had to be regarded as a capital expense for the purposes of the Income and Corporation Taxes Act 1988 s.686(2AA). The starting point was that trustees' remuneration should be regarded as incurred for the benefit of the whole estate. In making a deduction from income trustees could use either the accruals basis or the cash basis.
The appellant commissioners appealed against a decision ((2007) STC (SCD) 362) that certain expenses of the respondent trustees (P) were properly chargeable to income, and P cross-appealed. P were the trustees of a broad discretionary trust under which almost all of the income was customarily accumulated. The trustees incurred expenses for trustees' fees, investment managers' fees, bank charges, custodian fees and professional fees totalling nearly £300,000 in the relevant tax year. On appeal by P the Special Commissioners held that the investment management fees were capital expenses not chargeable to income, but that the requirement to achieve a fair balance between income and capital beneficiaries meant that some proportion of P's other expenses in the year were properly chargeable to income for the purposes of the Income and Corporation Taxes Act 1988 s.686(2AA). In the case of accountancy fees, custodian fees and bank charges the commissioners accepted that an apportionment should be made so as fairly to attribute part of the expense to capital and part to income. P submitted that an element of the investment management fees, relating to how income was to be invested in order to accumulate it, or pending an expected decision to accumulate it, was properly chargeable to income, and that the remuneration paid to what were called non-executive trustees was properly chargeable to income.
(1) Attractive as the fairness argument was and powerful as it might otherwise seem to be in supporting some apportionment of some of P's expenses between capital and income, to the extent that any particular expense was to be regarded as incurred for the benefit of the whole trust estate it had to be regarded as a capital expense, Carver v Duncan (Inspector of Taxes) (1985) AC 1082 applied. Nor could that conclusion be escaped by pointing to some ability expressly conferred by a trust instrument to charge a given expenditure wholly or in part to income notwithstanding that, under the general law, it was an expenditure incurred for the benefit of the whole estate. Whichever pocket the trustees might choose as the pocket from which an expense was paid, the expense had an intrinsic nature under the general law such that, if it was incurred for the benefit of the whole estate, it was inescapably assigned to capital, Carver applied. The fact, were it so, that as between one class of beneficiaries and another or in the ultimate internal accounts of the trustees the given expense could be or was, by reason of some provision other than of the general law, treated or treatable as income would in such a case not overcome its intrinsic nature as capital because s.686(2AA) required the court to look at what the position would be "but for any express provisions of the trust". The Special Commissioners had erred in law in resisting the conclusion that expenses incurred for the benefit of the whole estate were inescapably to be treated as of a capital nature for the purposes of s.686(2AA). (2) The Special Commissioners were right in treating the totality of investment management fees as properly chargeable to capital because the investment advice was for the benefit of the estate as a whole. (3) The starting point was that trustees' remuneration should be regarded as incurred for the benefit of the whole estate, Carver considered. At the lowest, there had to be a heavy evidential burden (not satisfied in the instant case) upon those who asserted some other conclusion. (4) In making the relevant deductions from the income trustees could use either the accruals basis or the cash basis so long as they were consistent year by year and any movement from one to the other could be demonstrated to have been done for good reason. (5) The commissioners' appeal in respect of the trustees' fees was allowed, but their appeal against the Special Commissioners' decision that the accruals basis was proper was dismissed. P's cross-appeal was dismissed.