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Treatment of expenses incurred by trustees

A UK IIP Trust receives rental income and in addition to normal expenses of a rental business has incurred professional fees in respect of the first lease of a property for more than 12 months (not allowable).

How are these expenses treated in the trust tax computations please? Are they deductible as trust management expenses? In particular, what will appear on the R185?

Suppose taxable rental profit is £3,000 and the disallowed expenses are £2,000. Tax payable by the trustees is £600, so will the R185 show £2,400 or £400 net?

In general, can an R185 certificate show a greater amount than the beneficiary can possibly receive?

I'm going round in circles on this one.

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By riksti
12th Jul 2012 14:02

TSEM8300

Have you tried TSEM? It seems to answer your questions here: http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM8300.htm

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By Bluffer
12th Jul 2012 15:09

Thanks riksti ....

I have looked at the manuals but I don't think they deal with my precise query (unless I really am mis-understanding the situation).

The example given states that Trust Management Expenses are present. I think my query is whether disallowed rental expenses can qualify as TMEs. If so, I think I can follow what to do. If not (and I think this is the case), then it seems that the R185 must show a higher figure than is available for distribution.

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By LyneT
13th Jul 2012 14:32

no is the answer

Only expenses which are income expenses are deductible from trust income if the trust is discretionary.

Expenses which relate to the trust as a whole, or capital are disallowable.  This is the case even when the trust deed says that the expenses are to be deducted from income (Carver v Duncan)

The expenses you refer to are capital, so non deductible.

If the trust is IiP then no expenses are deductible from tax.

They are of course deductible from the income paid to the beneficiary.

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By Bluffer
13th Jul 2012 17:05

Thank you LyneT...

Your clarification is much appreciated. Could I check one more thing please?

Following on from your last sentence, does that mean then that in the example in my original question the R185 will show £2,400 net but the beneficiary can receive only £400?

 

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By LyneT
14th Jul 2012 09:19

Depends on the terms of the trust

The expenses to which you refer are capital of the trust, not income.  So they should normally be taken from the capital account.  If the deed directs that such expenses are deductible from income payments, yes R185 will show £400. (still not deductible for tax though)  Otherwise, it will show £2,400.

Your problem could be if there are no liquid funds in the capital account to pay the life tenant.  He will have a tax liability on £2,400 but only recieve £400.

Hope I have explained this properly.

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By Bluffer
14th Jul 2012 12:14

Thanks again LyneT...

I'm sure you've explained it very well indeed, it's just that I'm not getting it.

The life tenant is a higher rate taxpayer, so if the R185 shows £400 he will effectively receive higher rate relief on the disallowed rental expenses; and that doesn't seem correct to me.

I think my superiors will have to deal with this one.

Thanks again.

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By LyneT
16th Jul 2012 09:00

Assume that the trust deed does not say that expenses relating to capital or to the trust as a whole are deductible from income.  Most do not, so I am assuming yours is the same.

In that case the R185 will show  £3,000 gross, tax at £600, £2,400 net.

The benefiary is assessed on this amount as he is entitled as of right to this amount.  You should not pay capital expenses, such as those you describe from his income.  If you do he can sue the trustees to get this amount.

If the only income of the trust is rent, then I would assume that there is no cash in the trust.  So I am assuming that the trustees have taken the capital expenses from the beneficiaries income.  As he has a right to this income, they did not have the power to do this.

The consequenses of this are that the beneficiary is assessed on income which he has not received and the trust owes the beneficiary that income.

Normally when trusts are drafted, either via a will or inter vivos, this situation is avoided by settling cash as well as property.

 

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