Whilst I agree with Simon Northcott that an appointment by the trustee of the discretionary trust before any assets have been appropriated to them can only take effect as the appointment of a chose in action, I am not sure that many dealing with such appointments necessarily appreciate that. I believe that most will anticipate that the appointee will receive the assets specified within the appointment, whether it be a property, shares or a cash sum, for example. My analysis of the income tax position has been based upon this approach, which I believe to be widely applied, albeit not necessary the correct legal position.
To adopt the position of treating the appointment of, say, a property (or shares) as a chose in action complicates the issue somewhat. If the appointment is treated as creating a chose in action, the appointee has no right to the asset nominally appointed, but merely has a right to a share of the estate ascertained by reference to the relative values of the âappointedâ asset (the Nominated Asset) and the distributable value as at the date of the appointment. As and when the asset is available to be appropriated to the appointee, it will need to be revalued for the appropriation, which could be significantly different to the value of the appointeeâs entitlement as a result of the exercise of the power of appointment.
By way of example, if, at the date of the appointment, the distributable value of the estate is ÂŁ500,000, and the Nominated Asset ÂŁ250,000, then the appointee will be entitled to a 50% interest in the estate, being the extent of the chose in action. If, at the time of the proposed appropriation of the Nominated Asset to the appointee, that asset is worth ÂŁ400,000 and the entire distributable estate ÂŁ650,000, there will be an over-distribution to the appointee if the asset is appropriated wholly to them.
Where the appointment is of a cash sum only, whilst it is arguable that the appointee would be entitled to that cash sum (no more, no less, unless the estate falls in value and is unable to satisfy the nominated sum), my understanding is that there is no real reason why it should be treated any differently from any other Nominated Asset, and so would fluctuate with changes to the distributable value of the estate from time to time.
I appreciate that there may be other views to how a chose in action should be approached in these circumstances. However, by separating out the differing stages of the appointment of a chose in action by trustees and the subsequent satisfaction of that appointment by the executors, rather than treating it as a single composite transaction, serves to create complications that I believe even HMRC is not desperate to have to address.
Paul Saunders