CG36320 | Life interests and interests in possession: Interests in possession: Introduction

The expression `INTEREST IN POSSESSION' is not defined in the tax legislation. It is however an important concept for Inheritance Tax as well as CGT, and the same principles apply for both taxes.

Broadly speaking, a person has an interest in possession in property if he or she has the immediate right to receive any income arising from it or to the use or enjoyment of the property. However an authoritative statement of the meaning of this term is provided in the majority opinions of the House of Lords in the Capital Transfer Tax case of Pearson v IRC [1980] STC318.

Board’s Press release

A Board's Press Release of 12 February 1976 included the following explanation: `An interest in possession in settled property exists where the person having the interest has the immediate entitlement (subject to any prior claim by the trustees for expenses or other outgoings properly payable out of income) to any income produced by the property as the income arises; a discretion or power, in whatever form, which can be exercised after income arises so as to withhold it from that person negatives the existence of an interest in possession. For this purpose a power to accumulate income is regarded as a power to withhold it, unless any accumulations must be held solely for the person having the interest or his personal representatives. On the other hand the existence of a mere power of revocation or appointment, the exercise of which would determine the interest wholly or in part (but which, so long as it remains unexercised, does not affect the beneficiary's immediate entitlement to income) does not in the Board's view prevent the interest from being an interest in possession.'

Although the Press Release was issued after the Court of Appeal decision in Pearson v IRC, it is consistent with the majority opinions of the House of Lords.

Further points

The tests for determining whether there is an interest in possession are largely the same as those applied in determining whether ITA07/s479 applies, see TSEM3019. However, there may be exceptional cases where the tests are different, in particular because Section 479 normally applies in cases where there is a right to accumulate the income, whereas if the accumulations must go to the beneficiary (or his or her estate) it can still be an interest in possession.

The basic question to be answered is whether the beneficiary is, when the trustees receive the income, entitled to all that income after they have deducted their expenses, and cannot be deprived of it by the act of the trustees. If so, it is an interest in possession. See Miller v IRC [1987] STC108.