Policy paper

Statement of Practice E1

Published 1 April 1978

Powers of appointment

1. It is not necessary for the interests of individual beneficiaries to be defined. They can for instance be subject to powers of appointment. In any particular case the exemption will depend on the precise terms of the trust and power concerned, and on the facts to which they apply. In general, however, the official view is that the conditions do not restrict the application of Section 71 IHTA 1984 to settlements where the interests of individual beneficiaries are defined and indefeasible.

2. The requirement of Section 71(1)(a) IHTA 1984 is that one or more persons will, on or before attaining a specified age not exceeding twenty five, become beneficially entitled to, or to an interest in possession in, the settled property or part of it. It is considered that settled property would meet this condition if at the relevant time it must vest for an interest in possession in some member of an existing class of potential beneficiaries on or before that member attains 25. The existence of a special power of appointment would not of itself exclude Section 71 if neither the exercise nor the release of the power could break the condition. To achieve this effect might, however, require careful drafting.

3. The inclusion of issue as possible objects of a special power of appointment would exclude a settlement from the benefit of Section 71 if the power would allow the trustees to prevent any interest in possession in the settled property from commencing before the beneficiary concerned attained the age specified. It would depend on the precise words of the settlement and the facts to which they had to be applied whether a particular settlement satisfied the conditions of Section 71(1). In many cases the rules against perpetuity and accumulations would operate to prevent an effective appointment outside those conditions. However the application of Section 71 is not a matter for a once-for-all decision. It is a question that needs to be kept in mind at all times when there is settled property in which no interest in possession subsists.

4. Also, a trust which otherwise satisfies the requirement of Section 71(1)(a) would not be disqualified by the existence of a power to vary or determine the respective shares of members of the class (even to the extent of excluding some members altogether) provided the power is exercisable only in favour of a person under 25 who is a member of the class.

Annex to Statement of Practice E1

Practical illustrations of IHTA 1984 section 71. The examples set out below are based on a settlement for the children of X contingently on attaining 25, the trustees being required to accumulate the income so far as it is not applied for the maintenance of X’s children.

Example A

The settlement was made on X’s marriage and he has as yet no children.

IHTA 1984 section 71 will not apply until a child is born and that event will give rise to a charge for tax under IHTA 1984 section 65.

Example B

The trustees have power to apply income for the benefit of X’s unmarried sister.

IHTA 1984 section 71 does not apply because the conditions of subsection (1)(b) are not met.

Example C

X has power to appoint the capital not only among his children but also among his remoter issue.

IHTA 1984 section 71 does not apply (unless the power can be exercised only in favour of persons who would thereby acquire interests in possession on or before attaining age 25). A release of the disqualifying power would give rise to a charge for tax under IHTA 1984 section 65. Its exercise would also give rise to a charge under IHTA 1984 section 65.

Example D

The trustees have an overriding power of appointment in favour of other persons.

IHTA 1984 section 71 does not apply (unless the power can be exercised only in favour of persons who would thereby acquire interests in possession on or before attaining age 25). A release of the disqualifying power would give rise to a charge for tax under IHTA 1984 section 65. Its exercise would also give rise to a charge under IHTA 1984 section 65.

Example E

The settled property has been revocably appointed to one of the children contingently on his attaining 25 and the appointment is now made irrevocable.

If the power to revoke prevents IHTA 1984 section 71 from applying, (as it would for example, if the property thereby became subject to a power of appointment as at C or D above), tax will be chargeable under IHTA 1984 section 65 when the appointment is made irrevocable.

Example F

The trust to accumulate income is expressed to be during the life of the settlor.

As the settlor may live beyond the 25th birthday of any of his children, the trust does not satisfy the condition in subsection (1)(a) and IHTA 1984 section 71 does not apply.