Trustees of the Peter Clay Discretionary Trust v Revenue and Customs Commissioners (SpC 595) (2007)
A single fee for the expenses of management of a discretionary trust that related partly to income and partly to capital could be attributed partly to each for the purposes of the Income and Corporation Taxes Act 1988 s.686(2AA).
The appellant trustees of a United Kingdom resident discretionary trust (P) appealed against a closure notice disallowing certain trustee's expenses in the computation of the rates applicable to trusts. There was a dispute between the Revenue and P as to the amount properly deductible for income tax purposes under the Income and Corporation Taxes Act 1988 s.686(2AA) as being expenses properly chargeable to the income of the trust, which was customarily accumulated and thus required to be invested. The ambit of the dispute included trustees' fees, investment management fees, bank charges, custodian fees and professional fees for accountancy and administration. The issue was whether a single charge could be attributed to both income and capital elements when it covered different work in relation to each element. P argued that (1) it was a cardinal principle of trust law that the trustees had to keep the balance between income and capital, and it would be unfair to one or other class of beneficiaries if a particular management expense of a trust relating partly to income could not be attributed partly to income and partly to capital; (2) trustees' fees were an expense of the trustees and were normally chargeable to income; (3) before accumulation income was still income and the expenses of dealing with it, including a proportion of the investment managers' fees on how to invest the accumulations, was allowable as an income expense; (4) the allowable expenses were deducted on an accruals basis.
(1) There ought to be attribution unless the expense really was a capital expense where the interest of the beneficiary was merely a consequential loss of income on the capital that went to pay the expense, as it could be understood to be a case where only capital was relevant, Carver v Duncan (Inspector of Taxes) (1985) AC 1082 applied and Bennett, Re (1896) 1 Ch 778 distinguished. Whilst there was no authority about attribution of a single expense there was a requirement to achieve a fair balance between income and capital beneficiaries, as demonstrated by Underhill and Hayton on the Law Relating to Trusts and Trustees (ed 17) at art.51. A proportion of the trustees' fees, bank charges, custodian fees and the accountancy and administration fees charged by the accountants was attributable to income for the purposes of s.686 of the Act. The Trustee Act 1925 s.22(4) illustrated that the expenses of an audit could be attributed to both income and capital. (2) " The expenses of the trustees" in s.686(2AA) of the 1988 Act could include payments to the trustees themselves. The payments were from the trust property to the trustee as an individual in his personal capacity and he did not receive them as trustee. There was no reason in principle why attribution ought not to apply to trustee's fees. (3) The investment management fees were properly charged to capital. Accumulation took one beyond the point at which the expenses were "properly charged to income". The trustees would have resolved to accumulate the income at which point it became capital and the expenses of investing it were capital. (4) Whilst the deduction of the allowable expenses on an accrual basis was a proper way of allocating expenses to a particular year of assessment, achieved a better result in terms of fairness between income and capital beneficiaries, and was more suitable to larger trusts such as that in the instant case, deduction on a cash basis was not wrong.