In these straitened economic times, many trustees are worried about preserving their trust funds, and are concerned to reduce their liabilities.

They can also come under pressure from a beneficiary with a life interest (ie, the right to the income from the trust) to pay fewer expenses from income, on the basis that this will leave more income for the beneficiary to enjoy, and despite the fact that the proper payment of trust expenses from income can have income tax advantages.

A query from trustees reviewing the expenses of the trust is frequently: what kind of expenses, and what proportion of such expenses, should we be paying from income or capital?

Basic rule

Expenses incurred for the benefit of the whole trust are payable from capital, and expenses relating exclusively to the income of a trust are payable from income. Expenses can be apportioned where it can be shown that part of the expenses related exclusively to income.

Deductions for tax

Trust expenses are the administrative expenses of a trust (ie, costs which the trustees incur in running the trust). It is the duty of the trustees to determine whether an expense should be deducted from capital or income.

This is significant for trustees as it can result in income tax liability being reduced. Trustees must consider:

  • the provisions of the trust deed;
  • legislation;
  • case law; and
  • specific court orders.

Only trust expenses which the general law allows to be charged to income (not capital) are deductible for tax purposes.  

Capital or income?

The Revenue contend that few expenses will be allowable against income as most expenses are incurred for the benefit of the trust as a whole.

A case from 2007 (Trustees of Peter Clay Discretionary Trust) found that most expenses are capital expenses. Only recurrent expenses incurred exclusively for the benefit of income beneficiaries (ie, life tenants) can be charged against income. When an expense is incurred to confer benefit on both income and capital beneficiaries then it is incurred “for the benefit of the whole trust fund” and is therefore a capital expense.

Where an expense relates to both capital and income, a part of the item that relates exclusively to income can be allocated to income. The onus is on trustees to demonstrate that part of a trust expense relates exclusively to income.

Finding cash to meet expenses

If the trustees do not have enough cash to pay expenses or they have income but no capital cash or vice versa, then subject to the terms of the trust and the duty to maintain a balance between beneficiaries, they can:

  • allocate capital expenses to income using an express power;
  • pay capital expenses from income but allocate them to capital in the accounts to be repaid when capital cash is available;
  • borrow money to pay the expenses; or
  • exercise a dispositive power.


A trust expense that includes costs incurred exclusively for the benefit of income beneficiaries can be apportioned between income and capital. A trust expense which does not include such costs benefits the whole trust fund and cannot therefore be apportioned, so it is a capital expense.

It is for the trustees to demonstrate that part of a trust expense relates exclusively to income, if this is the case. Trust can no longer adopt a “rule of thumb” approach, but should try to keep detailed records to demonstrate the apportionment eg, itemised invoices, separate fees for income/capital, time records or “realistic” estimates.