Trust expenses are the administrative expenses of a trust that the trustees incur in the course of their duties running the trust1.
The term 'trust management expenses' is no longer used in the legislation2 to avoid giving the impression that all expenses incurred in the course of managing a trust are necessarily allowable for tax purposes, although it is still used in HMRC's guidance3. While in trust law expenses can be charged to either trust income or capital, as appropriate, they must be properly chargeable to income (as opposed to capital) to be allowable for income tax purposes4.
Since an individual would not be able to offset such administrative expenses against their own income personally, these expenses cannot usually be set off against the income of:
• a bare trust, as the beneficiary has an absolute right to the capital and income and is taxed as if they owned the trust property personally5
• the settlor of a settlor-interested trust, as they are taxed as if they owned the income personally6 (see I5.1120)
In general, trustees are taxable on the trust's income with no deduction for any expenses of administering the trust7.
However, where they are trustees of an accumulation or discretionary settlement and liable to pay tax at the trust rate or dividend trust rate, their liability on income used to pay allowable trust expenses is reduced to the basic rate or the dividend ordinary rate (see I5.1010)8.
The trustees of an interest in possession settlement cannot obtain any