Guidance

Trust management expenses (TMEs) 2023 (HS392)

Updated 6 April 2024

This helpsheet will help:

• trustees of accumulation or discretionary trusts fill in Section 13 of the Trust and Estate Tax Return read Part 1 of this guide
• trustees of interest in possession (liferent) trusts establish the correct trust management expenses to take into account before advising beneficiaries of their net entitlement — read Part 2 of this guide
• trustees of mixed trusts — you will need to read all 3 parts

Trustees may use this guidance to make returns or advise beneficiaries. This helpsheet is a guide only and does not cover all issues. You can find more detail in the Trusts, Settlements and Estates Manual.

About trust management expenses (TMEs)

In managing a trust the trustees may incur expenses in the course of exercising their duties and powers. These expenses are quite separate from any expenses trustees may incur in, for example, carrying on a trade or property income business, which are deductible in arriving at the amount of profits from these sources.

TMEs are not the same as payments made to or on behalf of beneficiaries (distributions).

For tax purposes, only income expenses are allowable as TMEs. Expenses that are incurred for the benefit of the capital beneficiaries, or for the benefit of both income and capital beneficiaries (‘the whole estate’), are not allowable as TMEs. They cannot be charged to income, and they cannot be apportioned.

Expenses that are exclusively for the benefit of the income beneficiaries are chargeable to income and so are allowable. Such expenses may have been recorded separately, and can be identified. Where such an expense is not recorded separately, but the time related to these activities has been specifically recorded, the expense can be apportioned on a time basis. Where time records alone are not specific, the trustees can make a realistic estimate taking all factors into account. For tax purposes, the responsibility is on the trustees to show that expenses were incurred exclusively for the benefit of the income beneficiary, and to identify the relevant expenses.

This helpsheet includes a table of specific items. The table covers trustees of accumulation or discretionary trusts. It also covers interest in possession beneficiaries where there’s no specific provision for the item, or giving the trustees general discretion as to the incidence of expenses, in the trust deed.

Part 1 — accumulation or discretionary trusts

TMEs are taken into account only in calculating how much of trustees’ income is chargeable at the special trust rates. The calculation method is set out in the Trust and Estate Tax Return Guide in the notes to Question 13.

Only expenses that are properly chargeable to income in general trust law are allowable, disregarding any special provisions of the trust deed. For specific items, see the table attached.

Expenses are taken into account in the tax year in which they are incurred.

Part 2 — interest in possession (liferent) trusts

TMEs are taken into account only in arriving at the income of the income beneficiary and do not reduce the trustees’ taxable income. The calculation method is set out in the Trust and Estate Tax Return Guide in the notes to Question 13.

In contrast to accumulation or discretionary trusts, the provisions of the trust deed are taken into account. The beneficiary is taxable on their income entitlement under the deed. For specific items, see the table attached but note that it covers interest in possession beneficiaries only generally. The general guidelines in the table should be supplemented by reference to the deed.

Expenses are taken into account in the tax year in which they are incurred.

Part 3 — mixed trusts

Trustees should make a just and reasonable apportionment of TMEs between income chargeable at the special trust rates and income of the beneficiaries who are entitled to it. Trustees should refer to the rules for both types of trust as set out in Parts 1 and 2 of this guide and in the Trust and Estate Tax Return Guide in the notes to Question 13.

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