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Trust management expenses

Trustees may sometimes have to meet expenses when they carry out their duties. These expenses are called 'trust management expenses' and they may reduce the amount:

• that is taxed at the special trusts rates for accumulation and discretionary trusts
• of the income in possession beneficiary's taxable income

Which expenses are allowed against income?

Only trustee expenses that relate directly to trust income are allowed as trust management expenses. These might include the costs of:

• preparing a tax return for income received (this doesn't cover the cost of preparing capital gains pages - which must be excluded from the expenses claimed)
• deciding which beneficiaries to pay and how much
• paying income to beneficiaries

Some examples of expenses that aren't allowed

Some examples of expenses that aren't allowed include:

• expenses incurred for the benefit of the whole trust - such as most legal expenses
• the cost of investment advice or of changing trust investments
  

Under trust law, the above expenses relate to trust capital not trust income.

Expenses for things like trading or running a business don't count as trust management expenses. A trust's business expenses are deducted from its trading profits, just as they are with any other business - see the section below on other deductions.

An occasional misunderstanding is that trust payments to beneficiaries count as management expenses. This is not the case.

HM Revenue & Customs (HMRC) Helpsheet 392 Trust Management Expenses explains which expenses do and which expenses don't qualify.

• Helpsheet HS392 'Trust Management Expenses' Opens new window

Rules for deducting expenses for accumulation or discretionary trusts

With accumulation or discretionary trusts, allowable expenses can only be deducted from the income the trustees receive that is taxable at the 'special trust rates'. This is 42.5 per cent for dividends or 50 per cent for all other income. Expenses can't be deducted from the income of any part of the trust that is treated differently for tax purposes. For example, in a mixed trust where part of the trust is treated as an interest in possession trust.

Income that has been applied to pay trust management expenses is not chargeable at the special trust rates. Instead it's taxed at lower rates.

Expenses for accumulation or discretionary trusts are taken into account in the tax year in which they arise.

Trust management expenses are taken into account before applying the 'standard rate band'.

This is the first £1,000 of income that is taxed at lower rates. You can find out more about the standard rate band by following the link to 'Tax on different kinds of trust income' below.

• Tax on different kinds of trust income

• Discretionary or accumulation trusts

• Interest in possession trusts

Deducting expenses for interest in possession trusts

In the case of interest in possession trusts, trust expenses that are allowed can't be used to reduce the trustees' taxable income. Instead the trustees should take them into account when calculating the income due to beneficiaries.

The expenses are taken into account in the tax year in which they arise.

Order for deducting expenses from different types of income

Trust management expenses are deducted from different types of income in the following order:

• first from dividend-type income such as income from stocks and shares
• then from non-dividend-type income (rent, trade, savings)

Where to find out more

You can find out more about dealing with trust management expenses in the HMRC guide on filling in the Trust and Estate Tax Return. The notes to Question 13 give examples that show how to work out the expenses deduction for the different types of trust.

• Interest in possession trusts

• Trust and Estate Tax Return Guide Opens new window

• Helpsheet HS392 'Trust Management Expenses' Opens new window

Other deductions you can make from trust income

Trustees may be able to claim reliefs and allowances on a trust's income from:

• a trade or partnership carried on by the trustees
• UK land and buildings that the trust owns
  
• foreign assets
  

You can get more information about these reliefs and allowances in the guidance notes for the relevant supplementary pages of the Trust and Estate Tax Return. These are:

• Trust and Estate Trade
• Trust and Estate Partnership
  
• Trust and Estate UK Property
• Trust and Estate Foreign

• Trust and Estate Trade pages Opens new window

• Trust and Estate Partnership Pages Opens new window

• Trust and Estate UK Property Pages Opens new window

• Trust and Estate Foreign Pages Opens new window

Trusts with vulnerable beneficiaries

Some trusts set up to help 'vulnerable beneficiaries' may qualify for special tax treatment. In this context, a vulnerable beneficiary is one of the following:

• a person with a mental or physical disability
• a child below the age of 18 - a 'relevant minor' - whose parent has died
  

The trustees are able to claim a relief based on the difference between what they would normally have to pay and what the vulnerable beneficiary would have had to pay if the income of the trust had arisen directly to them as individuals.

Use the link below to find out more about trusts for vulnerable people.

• Trusts for vulnerable people

More useful links

• How to pay Self Assessment Opens new window

Useful contacts

• Contact HMRC Trusts & Estates