Income Tax – Expenses of trustees

Introduction

The case deals with the deductibility of expenses incurred by trustees.

The Facts

The Peter Clay Discretionary Trust, one of a family of six trusts, was constituted by a deed dated 5 December 1995.

There were four trustees: two individuals (“non-executive trustees”) who claimed only a fixed fee; a family trust company which made no charge; and an accountant (“executive trustee”) who was remunerated on a time basis. The case deals with the deductibility of expenses incurred by the trustees.

The Issue

Whether expenses of trustees can be apportioned between income and capital.

The Decision

The Special Commissioner dealt with the following expenses (i) trustees’ fees, (ii) investment management fees, (iii) bank charges, (iv) custodian fees and (v) professional fees for accountancy and administration. The Special Commissioner found in favour of the taxpayer that a proportion of all the expenses in issue, with the exception of the investment management fees, was deductible. However, it was decided that no part of the fixed fee payable to the individuals identified as “non-executive trustees” was deductible.

The Revenue appealed against the decision on all expenses (other than investment management fees) but made it clear that it did not challenge the conclusion on (iv) custodian fees and (v) professional fees for accountancy and administration. The trustees counter-appealed the decision on the investment management fees and the fees paid to non-executive trustees.

In the High Court, the judge allowed the Revenue's appeal but dismissed the trustees’ cross-appeal.

The Trustees appealed the decision on the investment management fees and the fees paid to non-executive trustees.

The fee of the non-executive trustees

The Trustees’ appeal on this expense was allowed. The Appeal Court Judge stated that the non-executive trustee fee could be apportioned into two or more parts and hence between income and capital. On this basis the expense was deductible.

The fee of the investment managers

The Trustees’ appeal was disallowed. The basis for the ruling was that the investment manager's fee related to capital and hence was not deductible.

The judgment is available online at http://www.bailii.org/ew/cases/EWCA/Civ/2008/1441.html