By the sound of it, the trust in this case is a form of the flexible power of appointment trust beloved of the insurance industry, enabling investment policy benefits to be held outside the settlor's estate for inheritance tax purposes for those whom the settlor wishes to see benefit outright from the investment after his death whilst retaining the ability to switch the benefit, generally in the settlor's lifetime, in the event of a change in circumstances.

This sort of trust will usually have two classes of beneficiaries, the 'primary beneficiar(y)(ies)' whom the settlor envisages as being the eventual recipients of the benefits of the trust fund (the 'immediate beneficiaries' in this case) and a class of 'secondary beneficiar(y)(ies)' in whose favour the trust fund benefits might be switched in the interim (the 'possible beneficiaries' in this case). The terms of the trust would be such as to give the primary beneficiaries the immediate entitlements in both the income and capital of the trust fund albeit that those entitlements are capable of subsequent defeasance by exercise by the trustees of the power of appointment referred to in the Query in favour of some or all of the secondary beneficiaries.

It is not clear which of these two categories of beneficiaries the son falls into, but this will be the key determinant of the tax treatment of the trust income.

In trust law terms, the immediate beneficiaries are each entitled to the trust fund's income as it arises, and the particular exclusion of section 31, Trustee Act 1925 removes any formal power of income accumulation for a minor immediate beneficiary; thus, if the son is within the class of immediate beneficiaries, he has an immediate income entitlement and a right to payment of that income as it arises. But, by virtue of section 629, ITTOIA 2005, any trust income so paid to or applied for the son's benefit in excess of £100 per annum is taxed on the father, as the settlor, at whatever rate would have been charged if it had actually been the father's income.

In those circumstances, there would be something to be said for the trustees retaining the son's income entitlement and paying the retained income over to the son after his 18th birthday. The section 629 settlor charge applies where trust income is 'paid to, or for the benefit of,' the settlor's minor, unmarried, child so that if there is no such income payment or application then there is nothing to tax under section 629 although it should be noted that payments of capital out of the fund will be treated as the income of the settlor to the extent that they can be matched against any available undistributed income, and likewise if retained or accumulated income is later paid to, or applied for the benefit of, the settlor's minor, unmarried, child (section 631, ITTOIA 2005). However, once the child has attained their majority, or married earlier, the section 629 settlor charge is no longer in point.

If the son fell into the class of possible beneficiaries only, then unless and until the trustees exercise their power of appointment in favour of the son, he will have no entitlement in either the income or capital of the trust.

In this latter context, it is worth mentioning that, in contrast to the position for capital gains tax purposes, a potential entitlement (as a possible beneficiary) for the settlor's infant, unmarried, child does not, as such, render the trust 'settlor-interested' within section 624, ITTOIA 2005 for income tax purposes. Exclusion of any benefit for both the settlor and the settlor's spouse takes the trust outside those provisions as is also the case for the IHT reservation of benefit rules and the income tax pre-owned assets tax charge, all of which, nevertheless, permit potential provision for the settlor's widow(er).