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The rule in Phipps v Ackers (1842) 9 CI & Fin 583 was described as follows by Lord Denning in Re Kilpatrick’s Policies Trusts, Kilpatrick v IRC [1966] Ch 730

‘When property is given in these terms: to A ‘if� or ‘when� or ‘as soon as� a time is reached, but that if A dies before that time, then the property is to go to B; in such a case A takes not a contingent interest, but a vested interest which passes to him at once as soon as the gift is made but is liable to be defeated if he dies before the time. �

The rule means that ‘A� is treated as beneficially entitled to the property up to the point where his interest is defeated and the property passes to ‘B�. The rule does not apply where there is evidence of a contrary intention so this can be a difficult area. The cases of Re Penton’s Settlement [1968] 1 WLR 248 and Re Mallinson’s Consolidated Trusts [1974] 1 WLR 1120 give some guidance as to how the courts approach these issues.

As the rule is concerned with the construction of a gift of capital it is not affected by any directions in the settlement as to the destination of intermediate income unless they are inconsistent with the existence of a vested interest - see Brotherton v IRC [1978] 1 WLR 610.

There is no equivalent rule in Scotland. Under Scots law a trust for A if living at the death of the life assured, and if not for B, would be regarded as postponing vesting until the death of the life assured. A trust for accumulation of any income arising before that event would be implied and there would therefore be no interest in possession. Even where, under Scots law, the interest of a beneficiary has vested in them but it is capable of being defeated, that would raise no entitlement in them to intermediate income - see Russell’s Trustees v Russell [1959] SC 148.

Most policies, however, contain a specific provision designed to create an income interest in possession (IHTM16062).