HM Revenue & Customs v Peter Clay Discretionary Trust

This is an appeal from the order made on 15 November 2007 by Mr Justice Lindsay on an appeal and cross appeal under section 56A of the Taxes Management Act 1970 from a decision of the Special Commissioners (Mr Adrian Shipwright and Dr John Avery Jones CBE) released on 27 February 2007.

The issue before the Special Commissioners was whether the Commissioners for H M Revenue & Customs had been correct, in a closure notice dated 30 November 2005, to disallow the attribution in part to income in the year 2000-01 of certain expenses incurred by the trustees of a United Kingdom resident discretionary trust. That issue arose in the context of section 686 of the Income and Corporation Taxes Act 1988 (TA 1988).

Section 686(1) TA 1988 (as in force at the relevant time) – read with section 686(2) - provided, so far as material, that the income arising to trustees of accumulation and discretionary trusts should be taxed not at the basic rate but at the higher rates (“the Schedule F trust rate” or “the rate applicable to trusts”) specified in sections 686(1AA) and 686(1A). But that provision was subject to section 686(2AA):

“686(2AA) The rate at which income tax is chargeable on so much of any income arising to trustees in any year of assessment as –

(a)

is income to which this section applies, and

(b)

is treated in accordance with section 689B as applied in defraying the expenses of the trustees in that year which are properly chargeable to income (or would be so chargeable but for any express provisions of the trust),

shall be the rate at which it would be chargeable on that income apart from this section, instead of at the rate applicable to trusts or the Schedule F trust rate (as the case may be).”

Section 689B TA 1988 prescribed the order in which expenses were to be set against different classes of income. In the present case nothing turned on the particular class of income against which expenses were to be set: the issue was whether the income arising to the trustees had been applied in defraying expenses which, in part, were properly chargeable to income.

It was common ground that the effect of section 686(2AA) TA 1988 was that, to the extent that income had been applied in defraying expenses which were properly chargeable to income, that income did not suffer tax at the higher rates applicable to the income of accumulation and discretionary trusts. The dispute between the trustees and the Revenue was whether it was proper for trustees to charge part of certain annual expenses to the income of the trust on the footing that that was what the proper application of the general law as to the incidence of trustees’ expenses required. Put shortly, the trustees contended that, where a particular expense of managing the trust related partly to income, that expense could and should be apportioned fairly between income and capital; so that part was attributed to income. The Revenue contended that apportionment between capital and income was not permissible in such a case: it was only those expenses which related wholly and exclusively to income that could be attributed to income: an expense which related partly to income and partly to capital was to be charged wholly to capital.

The expenses in issue before the Special Commissioners fell into five categories: (i) trustees’ fees, (ii) investment management fees, (iii) bank charges, (iv) custodian fees and (v) professional fees for accountancy and administration. The Special Commissioners ruled in favour of the trustees in respect of each of those categories save investment management fees. They held ([2007] UKSPC SPC00595)that:

“In accordance with the requirement to achieve a fair balance between income and capital beneficiaries, a proportion of all the expenses in issue, with the exception of the investment management fees, is attributable to income and is properly chargeable to income for the purposes of s 686(2AA)”.

But that statement of principle must be read with the further qualification (at paragraph 19(3) of the decision) that no part of the fixed fee payable to the individuals identified as “non-executive trustees” was attributable to income. The Special Commissioners adjourned the appeal to enable the parties to agree the proportion (or proportions) to be attributable to income; with a direction that that question could be restored for determination if need be. They held, further, that expenses should be allocated to a particular year of assessment on the accruals basis.

The Revenue appealed to the High Court from the Special Commissioners’ decision that a proportion of those expenses which related partly to income and partly to capital could be attributed to income. It was made clear, however, in the skeleton argument filed on their behalf in support of that appeal (at paragraphs 22, 49 and 50) that – although contending that the Special Commissioners had erred in principle in that respect - the Revenue did not challenge the conclusion that a proportion of expenses within categories (iv) and (v) – custodian fees and accountancy and other professional fees – could be attributed to income. It was accepted that a part of those fees could be said to relate exclusively to income: so satisfying the principle for which the Revenue contended. The Revenue appealed, also, in respect of the decision that expenses be allocated on the accruals basis. The trustees cross-appealed in respect of the decision that no part of fixed fee payable to non-executive trustees or of investment management fees could be attributed to income.

The judge allowed the Revenue’s appeal in respect of the attribution of expenses to income; but dismissed the appeal in respect of allocation on the accruals basis. He dismissed the trustees’ cross-appeal. Given that there was no challenge before him to attribution of a portion of expenses within categories (iv) and (v) – nor, in the event, to the attribution of a portion of expenses within category (iii) (bank charges) - it may be that his order of 15 November 2007 (paragraph (1) of which allowed the Revenue’s appeal save in respect of the decision that the accruals basis was a proper way to allocate expenses to a year of assessment) went further than he had intended.

It is from that order of 15 November 2007 that the trustees appeal to this Court. Permission to appeal was granted by Lady Justice Arden on 29 January 2008. There has been no cross-appeal. Further, the Revenue now accepts (as appears from paragraph 5 of the skeleton argument filed in this Court) that a proportion of the fees paid to the executive trustee is properly chargeable to income. The submissions before us have been confined to the fees paid to the non-executive trustees (that is to say, to a relatively small element of the expenses within category (i)) and to investment management fees (expenses within category (ii)).

The trust known as “the Peter Clay Discretionary Trust” was constituted by a deed dated 5 December 1995. It is one of a family of six trusts with the same trustees and broadly similar investment policies. At the relevant time there were four trustees: two individuals (described as “non-executive trustees”) who claimed only limited fees (fixed in amount) for the time spent in preparing for and attending trustee meetings; a family trust company which made no charge; and an accountant (described as the “executive trustee”) who was remunerated on a time basis for his service as a consultant to the firm of which he was formerly the senior partner. In the year in question (2000-01) the trustees’ fees amounted to £46,712: of which £41,712 was paid for the services of the executive trustee and £5,000 was paid to the non-executive trustees.

The Special Commissioners made the following findings of fact as to the role of the executive trustee:

“4(2) Mr Stockwell’s role is very active. He spends about 15 hours a week on the investments and a similar amount of time on the income of the six trusts, equating to about 1½ hours a week on the income of this particular trust. The work on income includes checking that the withholding taxes are deducted at the correct tax treaty rate in about 17 countries. Investments are held in a similar number of currencies. He sees daily income records of the Custodians on each account and in each currency on his computer. …

(3)

Rawlinson & Hunter bill quarterly for Mr Stockwell’s services as a trustee and separately for accounting services performed by other members of the firm. The amount of each part of the fee varied from quarter to quarter (although Mr Stockwell’s part is the same except for being less in one quarter) in the period under appeal from which we infer that the charges are calculated either on a time basis or on an agreed basis that was calculated in advance on the expected time. The fee is split between the six trusts on the basis of their value. …”

The trusts have three different investment managers, each with its own custodian. Each investment manager was remunerated by a fee calculated by reference to the capital value of the funds under management. The Special Commissioners found that:

“4(5) Both Mr Stockwell and Mr Custis [a director of Rathbone Trust Company Limited] drew attention to (and we accept) the changed role of investment advisers since about 1990. Originally a stockbroker would provide periodic advice on investments while the trustees dealt with transfer forms, keeping share certificates and collecting income. Now investment managers will use their nominee company, will have discretion to vary investments in accordance with trustees’ general instructions, will maintain accounts of income and capital, make payments out of each on the trustees’ instructions, produce statements of such accounts and valuations of investments, prepare annual tax information with a consolidated tax deduction certificate and compute capital gains, will check and chase up missing income, including dealing with withholding taxes.

(6)

Mr Custis said (and we accept) that where trustees’ fees were based on the value of the funds he would expect between 50% and 70% to be attributed to income. …”

The aggregate fees paid to investment managers in the relevant year in respect of the Peter Clay Discretionary Trust was £176,136.

The Special Commissioners were referred to a number of authorities including, in particular, the judgments in this Court in In re Bennett, Jones v Bennett [1896] 1 Ch 778 and the speeches in the House of Lords in Carver v Duncan [1985] 1 AC 1082. They noted, as a statement of the general rule, the observations of Lord Templeman in Carver v Duncan (ibid, 1120B-C), that:

“Trustees are entitled to be indemnified out of the capital and income of their trust fund against all obligations incurred by the trustees in the due performance of their duties and the due exercise of their powers. The trustees must then debit each item of expenditure either against income or against capital. The general rule is that income must bear all ordinary outgoings of a recurrent nature, such as rates and taxes, and interest on charges and incumbrances. Capital must bear all costs, charges and expenses incurred for the benefit of the whole estate.”

But they accepted that the underlying general principle was to achieve fairness between those beneficiaries entitled to income and those entitled to capital. And they directed themselves (at paragraph 17 of their decision) that:

“… in the light of the general principle of fairness ‘expenses incurred for the benefit of the whole estate’ should not be understood widely as meaning anything that is for the benefit of both the income and capital beneficiaries should be charged to capital and should not be attributed.”

The correct approach, in their view, was that an expense should be attributed in part to income “unless the expense really is a capital expense where the interest of the income beneficiary is merely the consequential loss of income on the capital that goes to pay the expense” (ibid).

Adopting that approach, the Special Commissioners concluded that, in principle, the fees charged in respect of the executive trustee – being fees based on time spent – could properly be attributed in part to income. But it would not be appropriate to attribute to income any part of the fixed fee paid to the non-executive trustees. The distinction lay in the fact that “the fee of the non-executive trustees does not vary according to the amount of work attributed to income, as does Mr Stockwell’s fee”. So the fixed fee paid to the non-executive trustees should properly be treated as an expense incurred for the benefit of the whole estate; and should be charged to capital.

The Special Commissioners found that the work of the investment managers was predominantly attributable to capital. They were satisfied, on the facts, that the custodian did the bulk of the work relating to the income. They went on to say this (at paragraph 19(5) of their decision):

“19(5) The only part seriously contended for attribution to income is the investment of accumulated income. If the accumulation were for a particular child then it would be proper to attribute the cost of investment of those accumulations to that fund, as opposed to the capital generally. Here since accumulations of income can be paid as income of a future year they are held on different trusts from the original capital and it would be proper to charge the fund with its investment rather than the whole capital. But the real question is whether because we are dealing with income until the accumulation takes place this is to be attributed to income. In our view accumulation of income takes one beyond the point at which the expenses are ‘properly chargeable to income.’ The trustees will have resolved to accumulate the income at which point it become capital and the expenses of investing it are capital. The position might well be different if the trustees are temporarily investing income while deciding whether to accumulate it.”

The judge took the view that the question raised by the Revenue’s appeal was determined by the passage in the speech of Lord Templeman in Carver v Duncan to which I have already referred. He accepted (at paragraph [31] of his judgment) that it was “possible to point to real doubts as to the applicability of Lord Templeman’s ‘general rule’ as to ordinary outgoings of a recurrent nature [in what the judge described as the second sentence of that passage]”; and accepted that, in propounding the rule in that second sentence as a ‘general rule’, Lord Templeman might have contemplated that there would be many exceptions. But he went on to say this (ibid):

“[31] … But the rule or principle as to capital bearing all expenses incurred for the benefit of the whole estate in the third sentence is not dependent or consequential upon the second sentence. It appears as an independent rule and one, unlike that in the second sentence, having its own prior authority as a base. …”

He observed that difficulties with the second sentence did not necessarily infect the third sentence.

The judge held that the proposition in what he described as the third sentence in the passage of Lord Templeman’s speech in Carver v Duncan – “Capital must bear all costs, charges and expenses incurred for the benefit of the whole estate” – was binding upon him. He said this:

“[33] Very attractive as the ‘fairness’ argument is and powerful as it might otherwise seem to be in supporting some apportionment of some of the Trustees’ expenses between capital and income, I fail to see, to the extent that any particular expense is to be regarded as incurred for the benefit of the whole trust estate, that I am at liberty, with respect to that expense, to ignore a principle which the House of Lords has held to be derivable from Bennett, to have been accepted for nearly 90 years and which the House of Lords itself, by Lord Templeman, twice re-states. Whatever doubts I might otherwise have had as to Bennett as intending to ground a rule of inescapable application, bound, as I am, by Carver, I am not free to read Bennett other than as establishing or re-stating the principle or rule, within the general law of trusts, as to trustees’ expenditure incurred for the benefit of the whole estate which Lord Templeman states, namely that it has to be regarded as a capital expense. Moreover, in a conflict between the second and third sentences, it is the latter, undoubtedly ratio, supported by prior authority and twice stated that has to be preferred as the more binding statement.”

He concluded (at paragraph [36] of his judgment) that the Special Commissioners had erred in law: they had been wrong in failing to apply the principle that “all costs, charges and expenses incurred for the benefit of the whole estate” were inescapably to be treated as of a capital nature for the purposes of section 686(2AA) TA 1988. In reaching that conclusion the judge observed (ibid) that, given the authoritative statement in Carver v Duncan, it did not assist the trustees that the principle “is unattractively inflexible or might in some circumstances be thought unfair”.

As I have said, the Revenue accepted before the judge that – consistently with the principle that all costs, charges and expenses incurred for the benefit of the whole estate must, necessarily, be treated as of a capital nature – an apportionment of bank charges, accountancy (and, I think, other professional) fees and custodian fees could properly be made “so as to attribute part of the expense to capital and part to income”. As the judge noted (at paragraph [37] of his judgment): “I have not been concerned to inquire into what has led the Revenue to accept that parts at least of such expenses were not incurred for the benefit of the whole estate”.

The judge rejected the trustees’ claim to charge part of the investment management fees against income. He said this:

“[38] As for the investment management fees, outstandingly the largest type of expense within the overall total … the Trustees accept that in the main they are properly chargeable to capital but there is an element thereof [it is said] which is properly chargeable to income. The Trustees resolved to accumulate income but there was not an accumulation, properly so-called … until the Trustees had invested the income and they had before that incurred expense in being advised as to how that income was to be invested. I have not had my attention drawn to any identifiable or identified element of the overall bill for investment management fees that was attributable to that particular type of advice but, in any event, the advice amounted to advice as to how best to make the income into capital, advice which, surely, redounded for the benefit of the estate as a whole. …”

The judge rejected, also, the trustees’ claim to charge part of their own fees against income. He made no distinction, in that respect, between the fee paid to the executive trustee and the fee paid to the two non-executive trustees. He observed (at paragraph [49] of his judgment) that, consistently with the principle derived from Lord Templeman’s speech in Carver v Duncan: “The starting point … should be that trustees’ remuneration should be regarded as incurred for the benefit of the whole estate. … At lowest, there must be a heavy evidential burden … upon those who assert some other conclusion”. That burden (as he found) was not satisfied in the present case.

In reaching that conclusion the judge accepted (at paragraph [47] of his judgment) that it was unnecessary for him to hold, as a rule without possible exception, that trustees’ remuneration in discretionary trusts falling within section 686 TA 1988 should always be regarded as having been incurred for the benefit of the estate as a whole. He recognised that “in exceptional circumstances and on particular evidence some exceptions may be discovered with respect either to some particular remuneration ascribable to the doing of a particular task, to an unusual trust provision or to the activity of some particular trustee such that it could clearly be seen that the service rendered and remunerated was not incurred for the benefit of the estate as a whole and was of an income character”. But he did not find there to have been evidence of that nature before the Special Commissioners in this case. He went on to say this:

“[48]. Moreover, the very ‘even hand’ requirement emphasised by the Trustees … assists the Revenue as it may tend to show how, at the level of the Trustees in a properly administered trust, consideration of the respective interests of capital and income are often inseparable. Even a decision which has seemed at first glance to relate only to capital will, if considered properly in an even-handed way, be likely to have involved a consideration of who, if anyone, for the time being is or should be entitled to income, what his, her or their needs are and whether, having regard to them, it is nevertheless right to do as was being considered with capital. Of course, the test, in relation to a trustee’s expense, is whether it was incurred for the benefit of the whole estate not whether its outlay involved consideration of both the interests of capital and income but that the whole estate falls to be considered will often point also to the whole estate being intended to be benefited.”

In their grounds of appeal, annexed to the appellants’ notice, the trustees do not seek to challenge the principle that capital must bear all costs charges and expenses incurred for the benefit of the whole estate. But it is said on their behalf that the judge was in error in failing to recognise that trustees’ fees and remuneration are in part incurred not for the benefit of capital but for the distinct benefit of income “in so far as it is necessary to get in, account for (and make tax returns of) income as such, and distribute or determine how to deal with the income (depending on the terms of the trust)”, that these are concerns of trustees which do not in any way impinge on capital, and that accordingly part of the burden of such fees and remuneration (not being incurred for the benefit of the whole estate) is not covered by the Carver v Duncan principle and should be charged to income. Further, it is said that all costs of dealing with any income should be charged to that income; and that that the costs of capitalising income (like costs incurred in distributing income) are themselves costs of dealing with the income in question and should be charged to that income.

As I have said it is common ground that expenses incurred “for the benefit of the whole estate” are chargeable to capital. But there is, I think, no true consensus between the parties as to the meaning of the expression “for the benefit of the whole estate”. It is necessary, therefore, to examine the judgments of this Court in Bennett and the speeches in the House of Lords in Carver v Duncan in order to understand the sense in which that expression is used.

In Bennett the principal asset of the deceased’s estate was an unsecured interest-bearing loan to a firm of wine merchants of which he had formerly been a partner. Under the agreement made on his retirement the loan was repayable on demand in the event of the breach of certain conditions intended to ensure the continued solvency of the firm. The question for the court was whether the costs of an annual audit and stock-taking of the debtor firm – which the executor and trustee deemed necessary to enable him to determine whether the conditions had been observed or the loan had become repayable – should be charged against capital or against income. It was held at first instance that expenses already incurred in connection with the first audit and stock-taking should be borne by capital; but that future expenses of that nature should be charged against income. The Court of Appeal took a different view in respect of future expenses. Lord Justice Lindley said this (ibid, 784)

“ … Why is this expense to be thrown upon the tenant for life? For whose benefit is it incurred? It is really for the benefit of the whole estate, though the practical effect of throwing it upon the whole estate will be that the tenant for life will lose the income of the sums expended.” [emphasis added]

Lord Justice Kay was of the same opinion (ibid, 786):

“Then comes the question out of what should the expense of the examination come – out of capital or out of income? In the first place the object of the provisions in the agreement is to ensure repayment of the capital... . Surely [the provision for examination] is a provision which the testator deliberately introduced into this agreement for the purpose of making himself safe as to the repayment of this capital which he had not charged in terms upon the capital of the business. The expense is one in which the persons entitled to the capital ought to share: why then should it all be thrown upon the tenant for life? ...”

And Lord Justice A L Smith said this (ibid, 787):

“Here the payment is one which the trustee, for the benefit of the tenant for life as well as of the remaindermen, may properly incur in order to see whether the 15,000l., of which the tenant for life receives the present income, and the persons entitled in remainder take the ultimate benefit, is safe or not. It is quite clear, in my judgment that the expenses of these audits are costs, charges and expenses incurred for the benefit of the whole estate, and therefore ought to come out of capital and not out of income.” [emphasis added]

Two points emerge from those passages. First, the annual audit was for the benefit of both life tenant and remaindermen. It was for the benefit of the life tenant (who was entitled to the interest on the loan until repayment; and thereafter to the income derived from the monies repaid) and for the benefit of the remaindermen (who were entitled to capital on the death of the life tenant) that the firm should not default on the loan. Second, the effect of charging the expense of the audit against capital was that both life tenant and remaindermen shared the burden of that expense according to their respective interests. The life tenant bore part of the burden because (as Lord Justice Lindley explained) she lost the income on the sums expended.

The expenses under consideration in Carver v Duncan included (so far as material in the present context) premiums paid in respect of life assurance policies, and the fees of professional investment managers. The question whether those expenses were chargeable against income arose under section 16(2)(d) of the Finance Act 1973 – which, for present purposes, posed a test indistinguishable from that under section 686(2AA)(b) TA 1988. Lord Templeman (with whose speech three other members of the House, Lord Fraser of Tullybelton, Lord Roskill and Lord Brandon of Oakbrook, expressed agreement) explained the nature of those expenses in the following passages ([1985] 1 AC 1082, 1120C-E and 1120H-1121A):

“In the present appeals, the appellant trustees of the Paul settlement paid the annual premiums on assurance policies effected by the trustees in order to obtain policy moneys corresponding to the amount of capital transfer tax payable out of the trust fund in the event of the death of the settlor before 20 November 1979. The appellant trustees of the Devonshire settlement paid the annual premiums on endowment policies assigned to the trustees and on other endowment policies effected by the trustees. All these premiums were paid by the Paul settlement trustees and the Devonshire settlement trustees for the benefit of the whole of their respective trust funds because the capital of the trust will be augmented by the policy moneys which will be received if and when the policies mature, and the income of the trust will be increased as and when such augmentation of capital takes place, but not before that event takes place.” [emphasis added]

“The Devonshire settlement trustees also paid annual fees to a firm of investment advisers to keep under review and to advise changes in investments comprised in the trust fund. This was a recurrent charge but not an ordinary outgoing and was incurred for the benefit of the estate as a whole because the advice of the investment advisers will affect the future value of the capital of the trust fund and the future level of income arising from that capital.” [emphasis added]

It is important to note that, in the paragraphs of his speech which I have just cited, Lord Templeman set out the reason why the expenses under consideration were incurred for the benefit of “the whole of their respective trust funds” or “the estate as a whole”: expressions which, as the context shows, he must be taken to have treated as synonymous with the expression “the whole estate”. In the first of those two paragraphs he explained that the premiums paid in respect of the life assurance policies were for the benefit of the estate as a whole because “the capital of the trust will be augmented by the policy moneys which will be received if and when the policies mature, and the income of the trust will be increased as and when such augmentation of capital takes place, but not before that event takes place.” In the second of those paragraphs he explained that the annual fees paid to the investment advisers were for the benefit of the estate as a whole because “the advice of the investment advisers will affect the future value of the capital of the trust fund and the future level of income arising from that capital.” As in Bennett, the relevant expenses were incurred for the benefit both of the income beneficiaries and of those entitled to capital on the determination of the income trusts.

Lord Templeman then cited the passages from the judgments of Lord Justice Lindley and Lord Justice A L Smith in Bennett to which I have already referred. He went on to say this (ibid, 1121G-H):

“Inre Bennett [1896] 1 Ch 778 which has been accepted law for nearly 90 years affirms the trust principle that expenditure incurred for the benefit of the whole estate is a capital expense. In accordance with the authorities and in accordance with principle, the premiums paid by the Paul and Devonshire settlement trustees in respect of capital transfer tax protection and on endowment policies and the fees paid to investment advisers were capital expenses and not income expenses.”

In the light of those passages in the judgments in Bennett and the speech of Lord Templeman in Carver v Duncan it is, I think, beyond argument that an expense is incurred “for the benefit of the whole estate” in the present context when the purpose or object for which that expense is incurred is to confer benefit both on the income beneficiaries and on those entitled to capital on the determination of the income trusts. The expression “expenses incurred for the benefit of the whole estate” must be understood in that sense. It is common ground – and, if it were not, this Court would be bound by the authority of Carver v Duncan so to hold – that expenses which are of that nature are to be charged against capital.

It follows, in my view, that it was not open to the Special Commissioners to approach their task on the basis that: “... in the light of the general principle of fairness ‘expenses incurred for the benefit of the whole estate’ should not be understood widely as meaning anything that is for the benefit of both the income and capital beneficiaries should be charged to capital and should not be attributed”: paragraph 17 of their decision. The judge was correct to hold (at paragraph [36] of his judgment) that the Special Commissioners had erred in law in that respect. They were required to accept that, under the general law, expenses incurred for the benefit of both the income and capital beneficiaries must be charged against capital. It is only those expenses which are incurred exclusively for the benefit of the income beneficiaries that may be charged against income.

At the time the appellants’ notice was filed – and the grounds of appeal settled in the terms to which I have referred – the trustees and their advisers were entitled to think that it was the Revenue’s contention that no part or parts of the trustees’ fees were properly chargeable to income. But it was made clear, in the skeleton argument filed on behalf of the Revenue in this Court, that the Revenue no longer maintained that contention. The Revenue’s position in this Court is set out in paragraph 5 of that skeleton argument:

“5.

Regarding the fee of the executive trustee, HMRC have hitherto contended that no part of the fee is properly chargeable to income. However, as explained below, in the light of the facts found by the Special Commissioners, HMRC now accept that the Special Commissioners correctly held that a proportion of the fee is properly chargeable to income.”

The basis upon which the Revenue accepts that apportionment of the executive trustee’s fee and remuneration is permissible is explained at paragraphs 12 to 14 of the skeleton argument. After referring (at paragraph 11) to the proposition (endorsed by the judge at paragraph [36] of his judgment) that “an expense which is incurred for the benefit of both the income and capital beneficiaries must be regarded as incurred for the benefit of the whole estate” the Revenue went on to say this:

“12.

However, HMRC do not contend that the rule is all or nothing, precluding the apportionment of a single expense. But apportionment is not based upon the general principle of achieving fairness between beneficiaries. Instead it is based upon the ability to demonstrate that part of the expense relates to the trustee’s duties to the income beneficiaries alone. That is, if it can be shown that an identified or identifiable part of an expense is for work carried out for the benefit of the income beneficiaries alone, then that part is properly chargeable to income.”

For the reasons which I have set out in the previous section of this judgment, I regard that as a correct statement of the general law. It leads to the conclusion stated in the following paragraphs of the Revenue’s skeleton argument:

“13.

The fee of the executive trustee in the present case is an example of a single expense which can be apportioned. The Special Commissioners found (decision, para. 4(2) and (3)) that the fee was calculated on a time basis and that one-half of the time which the trustee spent on the Trust was spent on the income of the Trust alone. From this they held (decision, para. 19(3)) that the fee could be attributed in part to income in exactly the same way as if a bank trustee had charged separate income and capital fees.

14.

In the light of the Special Commissioners’ finding of fact, HMRC now accept that they cannot challenge this decision as erroneous in law. Therefore HMRC no longer contend that no part of the executive trustee’s fee is properly chargeable to income.”

It seems to me, if I may say so, that a challenge to the Special Commissioners’ decision that a proportion of the fee paid to the executive trustee is properly chargeable to income was incapable of being sustained once the Revenue had accepted (as it did before the judge) that a proportion of the trustees’ expenses under head (v) - professional fees for accountancy and administration – were properly so chargeable. To put the point shortly: if professional fees incurred by the trustees for accountancy services can properly be apportioned (on a time basis) between fees attributable to dealing with the income of the trust fund and fees attributable to dealing with the capital of the fund, then it is impossible to see why the fees charged by the executive trustee for time spent in applying his professional judgment to the matters in relation to which those accountancy services are required should not also be capable of a proper apportionment.

It follows that the appeal must be allowed, at least to the extent of varying the order of 15 November 2007 so as to permit apportionment of the executive trustee’s fee and (as I have already mentioned) to permit apportionment of bank charges, custodian fees and professional fees for accountancy and administration. The only expenses now in dispute (as the Revenue accepts, at paragraph 6 of its skeleton in this Court) are the fee paid to the non-executive trustees and the fees of the investment managers.

As I have said, the Special Commissioners held that it would not be appropriate to attribute to income any part of the fixed fee paid to the non-executive trustees. They drew a distinction between that fee – which, as they said, did not vary according to the amount of work attributed to income – and the fee paid to the executive trustee – which did vary according to the amount of work attributed to income. On the basis of that distinction they concluded that the fee paid to the non-executive trustees should properly be treated as an expense incurred for the benefit of the whole estate; and so should be charged to capital in accordance with their understanding of the Carver v Duncan principle. The judge did not find it necessary to address, separately, the fixed fee paid to the non-executive trustees: he had held that none of the fees paid to trustees (whether executive or non-executive) could properly be apportioned to income.

The trustees submit that if apportionment is permissible in respect of the time-based fee paid to the executive trustee then there is no reason to deny apportionment in respect of the fixed fee paid to the non-executive trustees. The argument is summarised at paragraph 20 of counsel’s supplementary skeleton argument in this Court:

“20

... if the remuneration of any trustee must be supposed to take account of the work involved for income as well as for capital and if there is work of any substance involved in getting in and dealing with income (as plainly here was so) it cannot be right to differentiate between the fees payable to the different trustees. Each trustee has to deal with trust business some of which will be for the benefit of the trust as a whole and some of which will be for the purpose solely of making sure that income (the ‘annual harvest’) is properly accounted for and properly dealt with – the latter element is an income element as clearly as is the commission payable to an estate agent in getting in the rent from a tenanted building. So apportionment is appropriate for all trustees.”

On this issue the Revenue adopts the reasoning of the Special Commissioners. It is said that, in contrast to the position in respect of the executive trustee (where the Revenue now accept that apportionment is permitted), “the fixed fee of the non-executive trustees in the present case is an example of a single expense which cannot be apportioned”. The reason is said to be that “this fee, being fixed, did not vary according to the amount of work carried out for the benefit of income”.

To assert that the fixed fee paid to the non-executive trustees did not vary according to the amount of work attributed to income – or “according to the amount of work carried out for the benefit of income” – is, if I may say so, a statement of the obvious. The nature of a fixed fee is that it does not vary with the amount of work actually done to earn it: whether that work be attributable solely to income, solely to capital or to both income and capital. But the fact that the fee is fixed does not of itself prevent the fee from being apportioned into two or more parts. The amount of each part is ascertained by applying the appropriate proportion to the whole. So, if it could be established (say, by the keeping of time records) that the non-executive trustees spent one half of their time addressing matters which were exclusively for the benefit of the income beneficiaries, there would be no difficulty in principle in making an attribution of one half of the fixed fee to income. The hurdle which faces the trustees’ claim to charge a part of the fixed fee against income does not arise because the fee is fixed: it arises because, in the absence of time records, it will be difficult for the trustees to establish whether any (and, if any, what proportion) of the time of the non-executive trustees was spent addressing matters which were exclusively for the benefit of income.

The Special Commissioners made no finding as to the proportion of the time spent by the non-executive trustees in addressing matters which were exclusively for the benefit of the income beneficiaries. As I have said, they took the view (at paragraph 19(3) of their decision) that the fact that the fee paid to the non-executive trustees was fixed in amount was sufficient, of itself, to preclude apportionment. For the reasons just set out, I am satisfied that they were incorrect in that view. It is, I think, self-evident that – in the administration of discretionary trusts of income – the trustees may be expected to spend part of their time in addressing matters which are exclusively for the benefit of the income beneficiaries. By way of example, if the circumstances of individual beneficiaries are such as to require the trustees (in a proper exercise of their discretion) to make a distribution of income, they may be expected to spend time considering to whom and in what amounts such distribution should be made. As it seems to me, the Special Commissioners needed to make a finding whether, in the present case, the non-executive trustees did devote part of their time addressing such matters; and, if so, what proportion of their time was devoted to that task. It is, I think, no answer to say that, in the absence of time records, determination of that proportion will, necessarily, be imprecise: a realistic estimate can be made.

The trustees accept – as they must, in the light of the decision in Carver v Duncan - that advice as to the investment of capital or of income already accumulated should be charged to the relevant fund: their claim to charge the expense of obtaining investment advice is limited to “that element of investment advice required for the purpose of determining whether and if so how the current year’s income should be capitalized”. It is said on their behalf (at paragraph 21 of counsel’s supplementary skeleton argument) that:

“The argument is that if income is accumulated (as it was on a large scale in this case) then the process of capitalization involves investment and the cost of dealing with that process is as much the cost of dealing with income as is any other cost involved in the process of taking current income through to its eventual destination, whether it goes into the hands of a recipient beneficiary or goes in a capitalized form in the hands of a trustee required to keep it as such. Expense incurred before income has completed this process, and needed for the purpose of dealing with that income, must be an income expense because it is part of the expense of getting in and dealing with the annual harvest of the trust, not part of the cost of looking after the source of that harvest”.

The Special Commissioners took the view that once the trustees had resolved to accumulate the income, the monies to be accumulated ought properly to be regarded as capital; so that the expenses incurred in connection with the investment of those monies could not be said to be chargeable to income. They accepted that the position might be otherwise if the trustees were temporarily investing income while deciding whether to accumulate it. The judge took a similar view (at paragraph [38] of his judgment). As he put it: “the advice [in respect of income which was to be accumulated] amounted to advice as to how best to make the income into capital, advice which, surely, redounded for the benefit of the estate as a whole”. The Revenue support that analysis.

In my view the Special Commissioners’ analysis is correct. The first question is whether the expenses incurred in connection with the investment of income were incurred before or after the trustees had made the decision to accumulate that income. If the expenses were incurred after the trustees had made the decision to accumulate, they cannot, as it seems to me, be said to be expenses incurred exclusively for the benefit of the income beneficiaries. They must be charged against the capital of the accumulated funds. If the expenses were incurred before the trustees had made the decision to accumulate – and can be properly be characterised as expenses incurred for the purpose of temporarily investing income while deciding whether or not to distribute that income to the income beneficiaries – then (at least to the extent that the income was, in the event, distributed and not accumulated) the expenses could be said to have been incurred exclusively for the benefit of the income beneficiaries. But that is not said to be the present case.

I would allow this appeal to the extent indicated. Subject to any representations as to the form of the order which the parties may wish to make, I would set aside paragraphs (1) and (2) of the order of 15 November 2007 and substitute the following: (1) “the Commissioners’ appeal is dismissed (2) the Trustees’ cross appeal is allowed in relation to the fixed fee paid to the non-executive trustees but is otherwise dismissed.”

I agree that the order to be made on the appeal should be as indicated by Sir John Chadwick, for the reasons he gives.

I agree with the judgment of Sir John Chadwick and with the order he proposes. 

The essence of the argument of Mr Prosser for the Revenue with respect to the fees of the non-executive trustees was that a single fee was agreed for all the advice and thus that no apportionment was possible. In other words, the trust’s obligation to pay for the non-executive trustees’ services would only have been for advice given for the benefit of the trust as a whole. We have not seen any contractual documentation for the services of the non-executive trustees, but it would be a surprising omission if the contractual documentation showed that the non-executive trustees were only required to give the benefit of their advice if it was for the benefit of the trust as a whole. In those circumstances, it must follow that the non-executive trustees can be called on within their retainer to give advice exclusively for the benefit of income beneficiaries.

In the present case, we were informed that there are no time records and that there is no information as to what was considered at each trustees’ meetings. As appears from the judgment of Sir John Chadwick, the onus of showing that some of the fees of the non-executive trustees related to advice for the exclusive benefit of income beneficiaries rests on the trustees.