IHTM16066 | Interests in possession: what if there is no income?

The most common interest in possession is a life interest, usually in income producing assets such as stocks and shares, or in real property producing rent.

However it is not necessary for the property to produce income. An interest in possession may commonly exist in assets that do not produce income. A right to reside (IHTM16131) in a house is the most common example of enjoyment of property. Similarly, an interest in possession can subsist in chattels such as a painting or a necklace. It is not difficult to see that a life tenant can ‘presently enjoy’ things of this kind, without getting any money out of them.

An interest in possession can also exist in circumstances where the present ‘enjoyment’ is harder to identify. This arises in cases of life assurance policies where the beneficiary appears to take nothing until the death of the life assured.

The leading modern case on this point is Re Kilpatrick’s Policies Kilpatrick v IRC [1966] Ch 730. In this case the ‘settlement’ was made by the policy itself. The deceased effected several policies on his life for the benefit of his named wife ‘if she shall survive the assured for more than one month.’ (which she did); and if she did not, for the benefit of his sons equally absolutely.

The court held that that the wife had a vested interest in the policy from the time it was taken out, and not merely a contingent interest depending on whether she survived her husband for more than a month. She therefore had an interest in possession from the beginning, although it could be defeated by her failure to survive the husband for more than a month.

This rule might seem remarkable, but as more than one judge in the case remarked, if any income or benefit had arisen from the policy settlement during the husband’s life it was bound to be immediately payable to the wife.

Re Kilpatrick is important in emphasising the care that needs to be taken in analysing trusts of policies.

It is also helpful as a reminder that a vested defeasible interest in possession is not a reversion or a contingent interest.

In practice the point might not be seen very often, but it remains good law. It is not necessarily restricted to policies of assurance and should always be borne in mind when considering complex trusts.

In Scotland an interest in which the vesting is postponed or defeasible does not give the potential beneficiary any right to income as it arises (Anderson & Others v Russell & Others 1959 SLT (Notes) p23; Gloag & Henderson, The Law of Scotland 45.31). In such circumstances, that beneficiary does not have an interest in possession merely because of the potential vesting of the interest. Often, however, the terms of the trust direct how income is to be dealt with, and the provisions in this respect must be closely analysed in order to ascertain whether or not there is any interest in possession.

If the position is not clear then the case should be referred to Technical for advice.