Trust management expenses: income or capital

Trustee expenses count for tax only if they are properly chargeable to income under general trust law, and the courts have held that anything incurred for the benefit of the whole fund must be charged to capital. In a discretionary trust, income used to pay allowable expenses is taxed at 20% or 10.75% for 2026 to 2027 instead of 45% or 39.35%; in an interest in possession trust, allowable expenses reduce the income the beneficiary is taxed on. Trustees can apportion a fee between income and capital only where they can show that part of the work was solely for the income beneficiaries.

What are trust management expenses?

HMRC’s Trusts, Settlements and Estates Manual at TSEM8005 defines trust management expenses (TMEs) as expenses trustees incur in exercising their duties and powers. It stresses that they are not like trading deductions. The usual tax ideas of capital and revenue, such as new building against repairs, do not apply; what counts is income and capital in trust law. Rent and trading expenses are dealt with under the rules for those sources first, and TSEM8235 notes that relief cannot be given twice.

Distributions are never expenses. TSEM8015 says that paying a beneficiary’s utility bills, medical costs or other benefits is a distribution, so it is not an allowable TME however it is described in the accounts.

How does trust law decide between income and capital?

The leading cases are Carver v Duncan [1985] STC 356 and HMRC v Trustees of the Peter Clay Discretionary Trust [2009] STC 469. TSEM8120 summarises the Court of Appeal’s decision in Peter Clay as three categories:

Expenses for the whole estate, meant to benefit both income and capital beneficiaries, are wholly chargeable to capital. They cannot be charged or apportioned to income.
Expenses exclusively for the income beneficiaries are chargeable to income.
Expenses exclusively for the capital beneficiaries are chargeable to capital.

Carver v Duncan, summarised at TSEM8115, held that income bears ordinary recurrent outgoings needed to secure the income, while capital bears costs incurred for the benefit of the whole estate. Being recurrent is not enough: annual fees for investment advice were capital because the advice affects both future capital values and future income.

Which common expenses fall on which side?

Expense	HMRC’s usual treatment
Preparing trust accounts	Income, as accounting for trust income benefits the income beneficiaries (TSEM8712)
Preparing the trust tax return	Income if only income is returned; if gains are also returned, only the income related part (TSEM8715)
Tax advice	Capital where it concerns Capital Gains Tax or Inheritance Tax; income only for income tax returns or repayment claims (TSEM8719)
Investment advice	Capital, with a narrow exception for temporarily investing income before deciding whether to distribute it (TSEM8740)
Legal costs	Capital, except costs relating only to an interest in possession beneficiary and drafting resolutions to distribute income (TSEM8745)
Bank charges on a current account or overdraft facility	Capital (TSEM8720)
Insurance of trust assets	Generally capital, with a limited exception for some leasehold buildings insurance (TSEM8729)
Trustees’ fees	Can be apportioned; time spent deciding income distributions and beneficiaries’ income needs is income (TSEM8786)

Audit fees are a special case. Where an audit is commissioned under section 22(4) of the Trustee Act 1925, the trustees have a discretion over how the cost is borne, and TSEM8713 says HMRC accepts what they charge to income.

How can trustees apportion a single fee?

Peter Clay rejected apportionment simply to be fair between beneficiaries. TSEM8150 says apportionment rests on showing that an identified or identifiable part of an expense relates to work done for the income beneficiaries alone. HMRC’s guidance at TSEM8160 to TSEM8168 works through four situations:

expenses recorded separately as income work;
time records showing the share of time spent on income work;
other documents, such as minutes of distribution meetings; and
where there are no records at all, a realistic estimate.

The onus is on the trustees (TSEM8155). A fixed fee can still be apportioned; the court said the difficulty is evidence, not the fact that the fee is fixed.

How do expenses cut the tax in a discretionary trust?

Section 484 of the Income Tax Act 2007 lets trustees set allowable expenses against income otherwise charged at the special trust rates. TSEM8220 explains two features:

The test is what is properly chargeable to income in general trust law, ignoring the trust deed. A deed that throws a capital expense onto income does not make it allowable, and a deed that puts an income expense onto capital does not make it disallowable.
The expenses are grossed up, because they are treated as paid out of income that has borne tax at the basic or dividend ordinary rate (TSEM8245).

Section 486 sets the order: expenses go first against dividend income, then savings income, then other income (TSEM8250). For 2026 to 2027 GOV.UK gives the rates on income used for qualifying TMEs as 10.75% for dividends and 20% for other income, against the dividend trust rate of 39.35% and the trust rate of 45%. Unused expenses carry forward under section 485, and trustees who pay an income expense from capital in a lean year can reimburse capital from income later and claim it then (TSEM8240). From 2027 to 2028, section 479 as amended by Finance Act 2026 adds a property trust rate and a savings trust rate.

Tax charged at 20% or 10.75% on that slice does not enter the tax pool, because section 498 counts tax charged at the trust rate or the dividend trust rate. That can create a shortfall when income is later distributed; see discretionary trusts and the tax pool.

What does the split mean for an interest in possession beneficiary?

Here the expense is not a relief at all. TSEM8325 explains that the life tenant is only entitled to income after expenses properly charged to it, so they are taxed on that smaller amount. Under section 500, the trust deed takes priority: an expense the deed charges to income reduces the beneficiary’s taxable income even if trust law would put it on capital, and an income expense the deed puts on capital does not (TSEM8335). There is no grossing up of the expenses. HMRC’s example at TSEM8345: trust income of £1,000, allowable expenses of £250 and tax of £200 leave a net amount of £550, which grossed up at 20% gives £687.50 taxable on the beneficiary. The trustees show this on form R185.

Bare trusts generally have no allowable TMEs, because the beneficiary is taxed on the gross income (TSEM8405). For a settlor interested discretionary trust, TSEM8510 says the settlor gets no relief for TMEs at all; see settlor interested trusts. A mixed trust applies each set of rules to its own part (TSEM8610).

How might the figures look?

Illustration only. A discretionary trust has £4,000 of UK dividends and £6,000 of interest received gross in 2026 to 2027. The trustees pay £1,785 of fees, all evidenced as income work.

Grossed up at 10.75%, the expenses cover £2,000 of dividends (£1,785 divided by 0.8925). Tax on that slice: £215.
The other £2,000 of dividends at 39.35%: £787.
Interest of £6,000 at 45%: £2,700.
Total tax £3,702. Had the fees been capital, tax would be £1,574 plus £2,700, or £4,274, so the split is worth £572.

If the same fees were charged to capital in a life interest trust, the life tenant would receive more income and be taxed on more; the capital beneficiaries would bear the cost instead.

What mistakes come up most often?

Claiming investment management or advisory fees as income expenses.
Relying on a trust deed clause to make capital expenses allowable in a discretionary trust.
Apportioning a fee by a fixed percentage without time records, minutes or a reasoned estimate.
Deducting property expenses again as TMEs after they have reduced rental profits.
Treating payments for a beneficiary’s benefit as expenses rather than distributions.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.