HM Revenue & Customs v Trustees of the Peter Clay Discretionary Trust

For the purposes of the additional-rate provisions, expenses incurred for the benefit of the whole trust estate are capital expenses under the binding rule reaffirmed in Carver [1985] 1 AC 1082. General considerations of fairness between income and capital beneficiaries cannot displace that rule where statutory treatment is in issue. Trustees’ remuneration is ordinarily presumed to benefit the whole estate, subject to exceptional evidence. The legislation does not prescribe a mandatory cash or accruals basis for allocating expenses to a year of assessment. Trustees may consistently use either basis, provided any change is made for a good reason and not predominantly to reduce tax.

The Revenue appealed from a decision of the Special Commissioners concerning the attribution of discretionary trustees’ expenses between capital and income for the year ended 5 April 2001. The Commissioners treated investment management fees as capital expenses but held that proportions of other expenses, including trustees’ fees, were properly chargeable to income for the purposes of section 686(2AA) of the Income and Corporation Taxes Act 1988. They also accepted an accruals basis for allocating expenses to the relevant year.

The Trustees resisted the Revenue’s appeal and cross-appealed against the treatment of non-executive trustees’ remuneration and investment management fees relating to the investment of accumulated income. The central issues were whether expenses benefiting the whole estate were necessarily capital expenses, whether trustees’ remuneration fell within the statutory expression “expenses of the trustees”, and whether the legislation required a cash or accruals basis.

1. Revenue’s appeal on trustees’ fees allowed. The Special Commissioners were bound by Carver [1985] 1 AC 1082, in which the House of Lords reaffirmed the principle derived from Re Bennett [1896] 1 Ch 778 that capital must bear costs, charges and expenses incurred for the benefit of the whole estate. That principle was the ratio of Carver and prevailed over the more uncertain rule concerning ordinary recurrent outgoings.

2. Fairness and the duty to keep an even hand between beneficiaries could not justify apportionment contrary to that binding principle. The statutory question was directed to the intrinsic character of the expense under the general law, disregarding contrary express trust provisions. An expense benefiting the whole estate was therefore capital for the purposes of section 686(2AA).

3. Trustees’ remuneration could fall within “the expenses of the trustees”. The court rejected the argument that the expression necessarily excluded remuneration. The proper starting point was that trustees’ remuneration was incurred for the benefit of the whole estate. An exception might arise on particular evidence showing that specific remuneration related to a task not benefiting the whole estate, but no such evidence existed here. The same conclusion applied to executive and non-executive trustees.

4. The investment management fees were wholly chargeable to capital. Advice concerning the investment of income pending accumulation was advice for the benefit of the estate as a whole.

5. The Revenue’s timing appeal was dismissed. Sections 686(2AA) and 689B did not prescribe whether expenses had to be allocated on a cash or accruals basis. Trustees could consistently use either basis, provided a change was supported by a good reason and was not predominantly tax-driven. The accruals basis used here was permissible.

6. The Trustees’ cross-appeal was dismissed. The Special Commissioners’ treatment of non-executive trustees’ remuneration and investment management fees disclosed no error of law.

• Special Commissioners: held that investment management fees were capital expenses, that proportions of other expenses were properly chargeable to income, and that an accruals basis was permissible.
• High Court (Chancery Division): allowed the Revenue’s appeal concerning trustees’ fees, dismissed its timing appeal, and dismissed both limbs of the Trustees’ cross-appeal.