As explained in an earlier video: What is a Power of Appointment Trust? Flexible Trust 2006
A Power of Appointment trust sometimes known as a Flexible Trust is a trust, usually used for life insurance plans, whereby the beneficiaries are defined as a class e.g., ‘the Smith Family’, ‘My Blood Relatives’, ‘the England World Cup Football Squad’ etc., and then interest in possession beneficiaries are specifically named e.g., my daughter Joanne, my son James or in the terms of the England squad, the specific line-up for the football match e.g., No.1 Goalkeeper ‘David the Cat Smith’ and No.2 Right Back ‘John Crusher Jones’.
Tax rules changed in 2006 and 2008 and in simple terms, by changing the amounts or the names of the ‘interest in possession’ beneficiaries after those dates means that a Power of Appointment trust loses its Pre 2006 tax privileged status and changes to that of a discretionary trust with the potential for tax chargeable lifetime transfers and 10-year periodic inheritance tax charges. You are still allowed to make changes, but you must face the potential of more taxes being payable.
Hopes v Burton (2022) – Wrongly appointed beneficiaries
The courts have recently set a precedent in a case for a trust where the interest in possession beneficiaries were changed resulting in potentially more taxes being due.
1992 - Hilary Marsden (was Burton) established life insurance investment policies under a Power of Appointment Trust (a Flexible Trust).
2004 - Hilary passed away. Nobody was aware of the trust.
2012 - The trust was discovered.
2013 - The new trustees sought advice from a solicitor, and it was agreed that new deeds would be drafted to remove one of the immediate ‘interest in possession’ beneficiaries, not changing or affecting the benefits of the remaining two ‘interest in possession’ beneficiaries i.e., only the one beneficiary changed, and a discretionary trust technically then established for the other share.
2014 - Any inheritance taxes for the new Discretionary Trust deed part were due.
2017 - The Trustees sought further, expert legal counsel, who then suggested that by removing one of the three (pre 2006 Rules) interest in possession beneficiaries, then benefits for all qualifying interests in possession would be lost. In addition, as this was a revocable trust (i.e., could be changed/revoked), the two existing beneficiaries would also now be subject to a gift with reservation of the third beneficiary’s entitlement to the discretionary trust and full inheritance tax would also be payable on their deaths too. At the time this was a sizeable fund of more than £1m and the resulting tax bill would be £365,000 plus late payment interest of £68,000 plus any ongoing 10-year periodic tax payments. Legal counsel suggested that HMRC could contest and claim the tax.
2021 - An application to ‘set aside’ the 2013 Deed as a mistake and return the trust to its original position was made to the Court.
2022 - The judge decided that the 2013 appointment had created majorly different interests for the interest in possession beneficiaries, and that the trustees were mistaken in the advice and the actions taken. The judge ruled that this was “sufficiently serious as to make it unconscionable not to set aside both appointments”.
In plain English, the judge agreed that it was a big mistake and allowed the 2013 deed changes it to be reversed, putting the beneficiaries back as they were and protecting the pre 2006/2008 interest in possession rights and tax status.
What does this tell us? It tells us that this is complex, and we all need professional advice when establishing trusts or making changes to trusts.