Trustee fees

The income of discretionary or accumulation trusts is subject to income tax at the rate of 40%. However, where trust income has been applied in defraying trustees' expenses which are properly chargeable against trust income, the income is charged only to the lower or basic rate of income tax. Those expenses properly chargeable against income for tax purposes are those chargeable against income under general trust law principles (new s.484(5)(b) ITA 2007 refers).

The view of HM Revenue & Customs, most recently published in May 2006 and borrowing from the views expressed by the Law Commission, is that trustees' fees represent work done for the trust as a whole and are wholly chargeable to capital under general principles. Therefore, in the absence of an express power in the trust deed to permit apportionment of the trustees' fees between income and capital, the entirety of the fees would, as a matter of trust law, be properly chargeable to trust capital only and prohibit a claim by the trustees for any higher rate relief on any part of their fees.

In Peter Clay Discretionary Trust v HMRC [2007] SpC 595, it was held that trustees' fees (and the costs of third parties for equivalent services provided to the trustees) could be apportioned between income and capital as a matter of trust law (provided the basis of apportionment was capable of being justified).

The issue of trustee expenses properly chargeable against trust income has been a sore point between the Revenue and professional trustees for some years now and doubtless the Revenue are considering appealing the decision.