Q&As

If a trust’s sole asset is shares in a private company, how can expenses of the trust be paid without the trustees receiving a dividend, or borrowing funds which at some point may need to be written off?

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Published on LexisPSL on 03/09/2019

The following Private Client Q&A provides comprehensive and up to date legal information covering:

  • If a trust’s sole asset is shares in a private company, how can expenses of the trust be paid without the trustees receiving a dividend, or borrowing funds which at some point may need to be written off?
  • Loans to participators

This Q&A considers a UK resident trust.

See Practice Note: Trust expenses, which includes a discussion on income expenses and capital expenses.

Although trust manageable expenses (TMEs) are not tax deductible expenses in the same way as trading expenses, those that are deductible against trust income can reduce income tax liabilities as follows:

  1. the amount of income on which an interest in possession beneficiary is assessed is reduced by TMEs. The TMEs do not reduce the trust tax liability but they do reduce the beneficiary’s liability

  2. income used to pay for TMEs in discretionary and accumulation trusts is not subject to the higher trust rate of tax

It is therefore important, for tax purposes as well as trust administration purposes, to distinguish between TMEs applicable to capital (which offer no tax relief), and those applicable to income.

The solution might include selling the trust assets or to borrow, unless the trustee can successfully request that the directors declare a dividend. As a dividend is a subject to income tax, it may need to be grossed up to meet the expenses.

For further reading, see Practice Notes:

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