TSEM8615 - Trust management expenses: mixed trusts: part settlor-interested and part non-settlor-interested

Where the settlor has retained a clearly defined interest in a distinct part of the settlement, for example in one fund forming part of the settlement, only a corresponding part of the income is caught by ITTOIA/S619 etc (TSEM4200).

Where the trustees have incurred allowable trust management expenses, the TMEs are allowed in the normal way - either against the income chargeable to the special trust rates in an accumulation/discretionary trust, or against the measure of the beneficiary's income in an IIP trust. However, the TMEs corresponding to the part of the income chargeable on the settlor are not taken into account against the income that is charged on the settlor under ITTOIA/S619 etc.

The position for settlor-interested accumulation/discretionary trusts is set out below.

Settlor-interested accumulation/discretionary trust - current position

For 2006-07 onwards the trustees of settlor-interested accumulation/discretionary trusts are chargeable at the special trust rates (TSEM3020).

For example an accumulation/discretionary trust has income held a) half on trusts in which the settlor retains an interest, and b) half on trusts from which the settlor and the settlor’s spouse are excluded. The income arising to the trustees on a) and b) is chargeable at the special trust rates. The allowable expenses can be set against the income arising to the trustees on a) and b) as normal. However the settlor is chargeable on half the trustees’ income at his or her marginal rate with no relief for TMEs.

Settlor-interested accumulation/discretionary trust - earlier years

For years up to 2005-06 the trustees of settlor-interested accumulation/discretionary trusts were not chargeable at the special trust rates (TSEM3020).

For example an accumulation/discretionary trust has income held a) half on trusts in which the settlor retains an interest, and b) half on trusts from which the settlor and the settlor's spouse are excluded. The income arising to the trustees on a) is not chargeable at the special trust rates. Consequently the trustees get no relief for trust management expenses. The settlor is chargeable on the income at his or her marginal rate with no relief for TMEs. The income arising to the trustees on b) is chargeable at the special trust rates. Half the allowable expenses can be set against the income of b). The rest are not allowed for tax purposes.