Pearson (Re Pilkington) v IRC [1964] AC 612

B only has an interest in possession if entitled to the income as of right as soon as it has accrued to the trustees, subject only to their lien for expenses and other admin powers.

If Ts have a power to accumulate the income, or to divert the income elsewhere, or any other form of dispositive power, there can be no interest in possession.

Pearson established some certainty and it is possible to say that the borderline between trusts with and without an interest in possession (under the old regime) is reasonably easy to draw; where there is uncertainty about the entitlement of a beneficiary to income it is likely that the settlement will fall into the relevant property regime.

For there to be an interest in possession the beneficiary must be entitled to the income as it arises. 

Where this test to be applied strictly, however, even a trust with a life tenant receiving the income might fail to satisfy the req because trustees may deduct management expenses. So the distinction was drawn between administrative and dispositive powers by Viscount Dilhorne.

In Pilkington the trustees had an overriding discretion to apply income towards the payment of any taxes, costs, or other outgoings which would otherwise be payable out of capital and HMRC took the view that the existence of this overriding power was a further reason for the settlement lacking an interest in possession.

• Was this power administrative (in which case its presence did not affect the existence of any interest in possession) or dispositive (fatal to the existence of such an interest)?

• Viscount Dilhorne decided that the power was administrative.