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HMRC internal manual

Inheritance Tax Manual

The settlement: powers of appointment

Before reaching the income provisions of a settlement deed, it is usual to find powers of appointment of capital and income.

A power of appointment may allow

  • the trustees to appoint the capital by deed or deeds - or the capital and income - at their discretion;
  • appointment of capital to be made by someone authorised by the trustees in their discretion.

It will usually extend to the whole or part of the capital as the trustees in their absolute discretion decide, and the persons to benefit will be some members of the class of objects as the trustees in their discretion decide.

These powers alone do not tell us whether the trust is discretionary. ‘Income’ is within the powers above, but this does not mean that the income is subject to discretion as it arises. An exercise of the power in the prescribed form (deed) is required to dispose of the income.

  • The status of the trust (discretionary or IIP) is determined by the trusts that apply until the power of appointment is exercised (trusts in default of appointment). Many years might pass before any appointment is made.
  • In this case, after the income powers, the next clause might say, ‘Subject to and in default of appointment to William Jones for life.’ That is an interest in possession.
  • Or it could say, ‘Subject to and in default of appointment my trustees shall pay the income as it arises to such members of the discretionary class (defined at clause…) as my trustees in their absolute discretion think fit.’ That is non-interest in possession.

The power of appointment hangs over any existing vested interests in possession but has effect only when actually exercised. In deciding whether a trust is IIP or discretionary, the trust in default of appointment prevails.

If a person has an interest in possession they can demand their benefit, whatever it might be. But if the trustees have an existing power of accumulation the interest is not ‘vested’ and the trusts are discretionary.

Every settlement yields benefit, even if the benefit is not in the form of income. Whether it yields income, or a right to reside, or to enjoy a chattel, the benefit is produced day by day.


The trustees can exercise their power and take a beneficial interest away from William, the default beneficiary, and in doing so they bring William’s vested interest to an end. This gives rise to a claim under IHTA84/S52 (1) against William personally as the deemed transferor, on the full value of the underlying assets. (IHTM16091)

His interest in this example is said to be vested subject to divesting. It is an interest in possession for so long as he is allowed to enjoy it.

If the trustees revoke William’s interest and appoint to his brother James on similar terms, the trusts are still interest in possession. The important point is that the trustees’ power of appointment cannot be used retrospectively to deprive William or James of the benefit that was due to them up to the date on which the deed or resolution exercising the power says it is to go elsewhere.

In contrast, because a power of accumulation takes effect ‘at source’ before any interest can vest, its existence is enough to prevent William or James from taking any vested interest from the beginning.