Suppose a beneficiary (“X”) has a qualifying interest in possession in a trust. The trust has an overriding power of appointment. If the trustees exercise that power over the entire trust fund so that it becomes a section 89 trust with X (who has a qualifying disability) as its principal beneficiary, how is that treated for tax purposes?
On basic principles the termination of an IIP is treated as a PET made by the life tenant in favour of the recipient, or if the recipient is a trust (as it is in my example) then as a chargeable lifetime transfer made by the life tenant. But the fact that the life tenant is also the primary beneficiary of the section 89 trust must surely affect that. Does it? My thinking is that on X’s subsequent death the trust assets will form part of X’s death estate whether the power of appointment had been exercised or not.
Also is the appointment a disposal for CGT?
Some pointers to sources on this rare situation would be helpful. I’ve certainly never come across it before. Has anyone here?