A 'power of appointment' is an express power conferred by someone (the 'donor') to another person (the 'donee') that then enables the donee to dispose of property belonging to the donor, on terms set out by the donor for example the advancement of income and/ or capital to a specific beneficiary.

A power of appointment is an express power usually seen in a trust document (though this is not always the case) and will need to be drafted into a trust – there is no statutory power of appointment. Therefore, trustees can only amend the existing terms of the trust (as drafted), they cannot make unaccounted for changes such as taking capital out of the trust and paying it to a beneficiary. As a result, trust powers of appointment are usually drafted very broadly to ensure the trustees have the power they need to satisfy the requirements of the trust and the beneficiaries.

Powers of appointment are broadly categorised as either special or general powers of appointment. Section 7 of the Perpetuities and Accumulations Act 1964 Act sets out the distinction between a general power and a special power for perpetuity purposes. The meaning is broadly as follows:-

A general power of appointment is one under which there is only one donee of the power (who must be of full age and capacity when exercising the power) who can appoint the property either to himself during his lifetime; or to his estate where the power is exercised by will.

The power must be capable of being exercised without the consent of any other person or compliance with any condition. The crucial feature of a general power is that it can be exercised in favour of the donee himself.

A statement that the power may not be exercised in favour of a particular individual will not prevent it being a general power, provided that individual is not also the donee of the power.

A special power of appointment is any other power that does not fall within the definition of a general power. This would include a power to appoint to anyone in the world except the donee, or to be exercised with the consent of a particular person, or a joint power.

Powers of appointment conferred on trustees are usually special powers. It would often not be appropriate for a trustee to have a general power that would allow him to appoint to himself or anyone else. A settlor or a life tenant may have a special power of appointment under a settlement, or, less commonly, a general power of appointment. The perpetuity considerations on the exercise of a power will depend on whether it is a special power or a general power.

The holder of a general power of appointment is treated for estate tax purposes as if he or she is the owner of the property subject to the power, whether or not the power is exercised. Thus, the property which is subject to the power will form part of their estate for tax purposes and as such holding such a power of appointment does have tax repercussions.

If you give your holder a general power of appointment, the assets are included in the holder's taxable estate at their death and they are responsible for gift or estate taxes on the assets, even if they never exercise the power of appointment. The reasoning behind this is that the holder has control of the assets and, as such, has a form of ownership.

Powers of Appointment and categorising whether they are general/ limited and the effect on a person's estate can be rather complex and as such, specialist legal advice should always be sought when considering either creating them or when calculating their significance and effect in your Will or estate planning and administration.