Deemed Benefits
Revenue Manual
9.1 Introduction
Where a person receives a benefit as a result of the exercise of a power of appointment, section 36 CATCA 2003 defines who the disponer is. Normally, the disponer is the person who created the power of appointment. However, where a person holds a general power of appointment i.e. the power to appoint in favour of any person or to appoint to himself or herself, the person is treated as absolute owner and is therefore the disponer himself or herself in relation to any appointments made by him or her.
9.2 Legislation
A general power of appointment is defined in section 2 CATCA 2003 as including every power, which would enable the holder to appoint property to whomsoever he or she thinks fit or to obtain such power, right or authority. The holder can appoint the property directly in any manner he or she chooses or he or she can appoint to a limited class of objects of which he or she is one. By appointing to himself or herself, the holder can obtain absolute ownership and then dispose of the property as he or she wishes.
9.3 Examples
9.3.1 Example 1
Mary gives Sheila a life interest in property, together with a power exercisable by deed or will to appoint the property to any person as Sheila should choose and in default of appointment by Sheila the property passes on Sheila’s death to Nora.
The CAT Implications are as follows:
- Sheila takes a life interest from Mary coupled with a general power of appointment. Sheila is taxed on the full value of the property and not on the value of a life interest. Sheila is treated as having taken an absolute interest from Mary.
- If Sheila appoints to James, tax is payable on the basis of an inheritance of the full value of the property taken by James from Sheila when Sheila
- If Sheila dies without exercising her power of appointment, the property passes to Nora and tax is payable on the basis of an inheritance of the full value of the property taken by Nora from Sheila.
Section 36(2) defines a special power of appointment as a power of appointment, which is not a general power of appointment. The person who created the power is the disponer in the case of the exercise of a special power of appointment.
9.3.2 Example 2
Noel leaves property to his daughter Deirdre for life and after her death for such of his grandchildren as Deirdre by deed or will appoints and in default of such appointment for all his grandchildren equally.
The CAT Implications are as follows:
- Deirdre is taxed on the value of the life interest she takes from Noel. As Deirdre only has a special power of appointment, she is not treated as having taken an absolute interest.
- If Deirdre appoints the property to one particular grandchild, that grandchild is treated as taking the property from Noel and inheritance tax is payable accordingly when Deirdre dies.
- If Deirdre fails to exercise the power of appointment the grandchildren take an equal share of the property from Noel when Deirdre dies and they are taxed accordingly.
In the past, the use of certain types of wording in Wills has given rise to difficulties in this area. Take for instance the situation where a person by will leaves the residue of his estate to an executor “to be used by him or her as in his or her sole discretion he or she shall think fit”. The intention may have been to create a discretionary trust under the will with the executor being trustee only. However, the use of this type of wording has been held to give the executor an absolute interest in the residue because of the definitions of “absolute interest” and “general power of appointment” in section 2. The executor would be taxed on the full value of the residue and, if he or she appoints the residue to, say, a brother of the deceased, that brother is also taxed on the full value of the residue taken by him from the executor.