I. Powers Over Property
24.A5. Where a taxpayer has power (for example, under a trust, will or contract) to acquire property, whether on or prior to death, such property should be treated as property of the taxpayer. Examples include property the taxpayer can acquire by the exercise of a power of appointment or by the revocation of a trust. It is arguable that such a principle is too wide and that it is unfair to impose a tax in relation to property if the taxpayer has not enjoyed the ownership of the property or at least the yield of income from it. The answer to such an argument is that it was always open to the taxpayer, had he so chosen, to acquire the ownership of the property.
24.A6. A power to appoint property may be described as a power held by a person which enables that person to determine
the entitlement to property. The grant of such
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a power may be seen as a disposition of the property to
which it relates and may constitute a gift by the grantor. Where the holder of a power can appoint the property to
himself, the grant of the power may be seen as a disposition to the holder of the power coupled with a power in the
holder to divest himself of the property in favour of any other person who may be considered under the power. Once it
is accepted that a power to acquire property must be regarded as equivalent to ownership of the property for the
purpose of imposing a tax, then property subject to a power held by a taxpayer, which enables him to appoint to
himself, should be treated as property of that taxpayer for duty purposes.
24.A7. The Committee thus sees justification for imposing a tax in relation to the exercise or failure to exercise a power where the holder of the power can appoint to himself. A taxpayer should, however, be regarded as being able to appoint to himself if he can appoint to his creditors, and thereby discharge his debts, or to a company he controls or of which he is a shareholder or debenture-holder, or to a trustee of a trust (including a discretionary trust) in which he has an interest, or to his estate. The provision should extend to the cases where a company or a trustee holds a power and, by way of illustration, the company can appoint to its major shareholder or the trustee can appoint to a person who has power to remove him from office. If a taxpayer can appoint property between, say, three other persons and the relevant instrument provides that the property shall pass to the taxpayer if no appointment is made, the taxpayer should be treated as being able to appoint to himself.
24.A8. Assuming that a taxpayer has a power under which he may appoint to himself, questions arise as to the manner in which tax should be assessed in each of the following cases:
- (a) the exercise of the power, whether during life or on death by will;
- (b) the relinquishing or disclaimer of the power;
- (c) a valid assignment or a similar dealing with the power;
- (d) the expiry of the power by effluxion of time, the power not having been exercised; or
- (e) the death of the holder of the power, the power not having been exercised.
In case (e), the property should be treated as part of the deceased's dutiable estate. On each of the other occasions, the holder should be deemed to have made a disposition of so much of the property concerned as does not pass to him. Subject to the following exceptions, the disposal should be treated as being a disposal for no consideration. If the holder is required to pay any consideration on the exercise of the power in his own favour, then, in determining the extent of the gift, such consideration ought to be set off against the value of the property. If the holder is paid a sum in consideration of his exercising or failing to exercise the power or his relinquishing or assigning the power, the consideration ought to be set off against the value of the property in question in determining the amount of the gift.
24.A9. Special provisions are required in relation to a settlement of property that is subject to a power in the
settlor to appoint the property to himself, or to revoke the settlement except where the revocation is for the purpose
of re-settling the property on trusts under which the settlor is not a beneficiary. A power to revoke in these
circumstances is a power to appoint property to oneself. The Committee considers that, in determining the amount of
the gift involved in making the settlement, one should ignore the power to appoint or revoke. The manner in which the
amount subject to tax
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should be determined, at a later time, in any of the circumstances considered in
paragraph 24.A8 will require that the amount be limited to any increase in the value of the property between the date
on which it was settled and the date of exercise, relinquishment, assignment, expiry or death.
24.A10. A power to appoint income should be treated in the same way as a power to appoint capital. If A can appoint income to himself or to B or C and appoints the relevant income to B, A should be treated as having made a gift to B of the income appointed, irrespective of how the income may be treated under income tax legislation.
24.A11. There remain questions as to powers exercisable jointly or exercisable only with the consent of another person. If one or more of the holders of a power are members of the class of possible beneficiaries, then each such holder should be treated as owning a part of the property that is subject to the power, such part being the whole of the property divided by the number of holders. For example, if A and B hold a power jointly and the possible beneficiaries are A, C and D, the whole of the property subject to the power should be taxed in A's hands and not in those of B; if A and B hold a power jointly and the possible beneficiaries of the power are A, B, C and D, half the property should be taxed in A's hands and half in B's. A more sophisticated approach would be to determine the dominant party, where possible. The United States legislation attempts to do this. However, joint powers that include one of the holders as a possible beneficiary are fairly unusual, and the Committee doubts if the additional complications that would be involved in adopting the United States approach are justified.
24.A12. A consent may be required to the exercise of a power or to the selection of the objects or to both exercise and objects. The power is, in one view, tantamount to a joint power. On the other hand, it may be thought inappropriate to treat a right to withhold consent in the same way as a power under a joint power. The Committee prefers the former view, that a consent to the exercise of a power, where the person whose consent is required is an object of the power, ought to be recognised as equivalent to a power to appoint to oneself. The other view affords opportunity for avoidance.
24.A13. There should be a provision by which, if certain conditions are met, a power to appoint or a power to consent will be disregarded for the purpose of the taxing Act. The conditions would be that a taxpayer who has become the holder, or one of several holders, of a power to appoint or consent has, within a reasonable time after becoming aware of the existence of the power, taken all necessary steps to disclaim the power.