HM Revenue & Customs v Peter Clay Discretionary Trust

HM Revenue & Customs v Peter Clay Discretionary Trust

Expenses incurred for the benefit of both income and capital beneficiaries must be charged to capital. However, if a part of an expense can be shown to relate exclusively to income beneficiaries, that part may be charged to income. The Special Commissioners erred in law by failing to apply this principle. Apportionment of the executive trustee's fee, bank charges, custodian fees, and professional fees is permissible where evidence supports such division. The fixed fee for non-executive trustees may be apportioned if evidence is provided, but the burden is on the trustees. Investment management fees incurred after a decision to accumulate income are capital expenses.

Parties
Appellant/respondent: Commissioners for H M Revenue & Customs; Respondent/appellant: Trustees of the Peter Clay Discretionary Trust
Jurisdiction
England and Wales
Judgment Date
19 December 2008
Procedural Posture
Civil Appeal / Court of Appeal Judgment
Outcome
Appeal allowed in part; order of 15 November 2007 set aside and substituted.
Legal Topics
Allocation of Trust Expenses, Income and Capital Apportionment, Taxation of Discretionary Trusts
Trust Law Tax Law Allocation of Trust Expenses Income and Capital Apportionment Taxation of Discretionary Trusts

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Parties

Commissioners for H M Revenue & Customs

Appellant/respondent

Trustees of the Peter Clay Discretionary Trust

Respondent/appellant

Procedural Posture

Civil Appeal / Court of Appeal Judgment

Legal Issues

  1. 1 Whether certain trust expenses can be apportioned between income and capital for tax purposes under section 686(2AA) of the Income and Corporation Taxes Act 1988
  2. 2 Whether fixed fees paid to non-executive trustees and investment management fees are properly chargeable to income

Ratio Decidendi

Expenses incurred for the benefit of both income and capital beneficiaries must be charged to capital. However, if a part of an expense can be shown to relate exclusively to income beneficiaries, that part may be charged to income. The Special Commissioners erred in law by failing to apply this principle. Apportionment of the executive trustee's fee, bank charges, custodian fees, and professional fees is permissible where evidence supports such division. The fixed fee for non-executive trustees may be apportioned if evidence is provided, but the burden is on the trustees. Investment management fees incurred after a decision to accumulate income are capital expenses.

Court Disposition

Appeal allowed in part; order of 15 November 2007 set aside and substituted.

Orders

  • Commissioners' appeal dismissed
  • Trustees' cross-appeal allowed in relation to the fixed fee paid to non-executive trustees but otherwise dismissed