The deceased’s estate held mainly an unsecured interest-bearing loan to a firm of which he had been a partner. On his retirement the loan was repayable on demand if conditions for the continued solvency of the firm were not met. The court was asked whether the audit and stock-taking costs – which the executor and trustee deemed necessary to enable him to determine whether the conditions had been observed or the loan had become repayable – were to be charged against capital or 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.
Held: The appeal succeeded.
Lord Justice Lindley said: ‘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.’
Lord Justice Kay said: ‘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?’
A L Smith LJ said: ‘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.’
Judges:
Lindley LJ, Kay LJ, A L Smith LJ
Citations:
[1896] 1 Ch 778
Cited by:
Cited – HM Revenue and Customs v Trustees of the Peter Clay Discretionary Trust CA 19-Dec-2008
The court was asked whether the Commissioners had been correct to disallow in a closure notice, the attribution in part to income in the year 2000-01 of expenses incurred by the trustees of a United Kingdom resident discretionary trust. The expenses . .
Approved – Carver v Duncan HL 1985
The court considered whether expenses, premiums paid in respect of life assurance policies, and the fees of professional investment managers, were properly to be set against the capital or income of a trust.
Held: Lord Templeman said: . .
Lists of cited by and citing cases may be incomplete.
Income Tax, Trusts
Updated: 10 May 2022; Ref: scu.279007
