Trust Management Expenses

Trust Management Expenses (TMEs) are the costs of running a trust that trustees can deduct when working out how much tax the trust needs to pay. The rules differ significantly depending on what type of trust you're dealing with, and getting this wrong can mean paying more tax...

What are Trust Management Expenses?

Which trusts can claim Trust Management Expenses?

You can claim TMEs if you're a trustee of:

Accumulation or discretionary trusts – where trustees decide how to distribute income and capital
Interest in possession trusts (also called liferent trusts in Scotland) – where a beneficiary has the right to trust income as it arises
Mixed trusts – trusts with both discretionary and interest in possession elements

Bare trusts, where assets are held for a named beneficiary with an absolute right to them, follow different rules and don't use the TME system.

What expenses qualify as TMEs?

TMEs cover the administrative costs of managing the trust itself. These include:

Fees for professional trustees or trust corporations
Accountancy fees for preparing trust accounts
Costs of investment advice specifically for trust assets
Legal fees for trust administration matters
Fees for tax advice on trust matters

The key principle is that the expense must relate to managing the trust structure itself, not costs that would arise anyway from owning the underlying assets.

What expenses don't qualify?

You cannot claim costs that relate directly to the trust's property or investments, rather than trust administration. Common examples include:

Costs of buying or selling trust investments
Property repairs and maintenance
Property management fees
Insurance premiums for trust property
Gardening and property upkeep

These property-related expenses are deductible in a different way – they reduce the income from that property when calculating rental profits, rather than being treated as TMEs.

How TMEs work for accumulation and discretionary trusts

For accumulation and discretionary trusts, trustees can deduct allowable TMEs in full from the trust's income before calculating tax.

The order matters:

1. Deduct TMEs from the trust's income

2. Deduct the trust's standard rate band (£500 in 2025/26 for most trusts, or £1,000 if the settlor created only one trust)

3. Calculate tax on the remaining income

This means TMEs provide direct tax relief by reducing the amount of income taxed at the trust rates (currently 39.35% on dividend income and 45% on other income above the standard rate band).

How TMEs work for interest in possession trusts

The rules for interest in possession trusts are more restrictive. In these trusts, the beneficiary with the interest in possession has a right to the trust income, so they – not the trust – pay income tax on it.

Trustees can still claim TMEs, but only a fraction of them. The deductible amount is limited to the proportion of trust income that doesn't go to the income beneficiary.

Here's how it works:

If the trust has £10,000 of income and the income beneficiary receives £9,000, only 10% of the TMEs can be deducted by the trustees when calculating the trust's tax liability. The remaining 90% of management expenses effectively provide no tax relief.

This reflects the principle that the bulk of the trust income (and its tax liability) belongs to the beneficiary who receives it.

Mixed trusts: combining both approaches

Mixed trusts contain both interest in possession elements and discretionary elements. You need to:

1. Split the trust's income between the two parts

2. Allocate TMEs proportionately between them

3. Apply discretionary trust rules to the discretionary portion

4. Apply interest in possession trust rules to the other portion

This requires careful record-keeping to demonstrate how you've apportioned income and expenses between the different parts of the trust.

Record-keeping requirements

Keep detailed records of all trust expenses, including:

Invoices and receipts for professional fees
Bank statements showing payments
A clear description of what each expense relates to
Documentation showing how you've allocated expenses in mixed trusts

HMRC may ask you to justify TME claims, particularly for larger amounts or where the distinction between trust management and property management isn't immediately obvious.

Completing the Trust and Estate tax return

Report TMEs in the appropriate boxes on the Trust and Estate Tax Return (SA900). The specific boxes depend on your trust type:

Accumulation and discretionary trusts: deduct TMEs before calculating the tax liability
Interest in possession trusts: claim only the restricted proportion that relates to income retained by the trust

If you're unsure how to allocate expenses or which boxes to complete, detailed guidance accompanies the SA900 form.

Common pitfalls to avoid

Don't claim the same expense twice. If you've deducted property expenses when calculating rental income, you can't also claim them as TMEs.

Don't assume all professional fees qualify. Investment management fees for selecting and monitoring investments are TMEs, but dealing costs for buying and selling are not.

For interest in possession trusts, don't claim the full TME amount – remember to restrict the claim to reflect the income retained by the trust.

Sources

Trust Management Expenses (TMEs) (Self Assessment helpsheet HS392)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.