Does anyone know how HMRC treat a usufruct for CGT purposes? The only reference in their CGT manual is to CGT on death where they say that a usufruct is similar to a Scottish proper liferent. In their IHT manual, they say they regard a usufruct as an interest in possession trust but that their view is controversial. There have been posts on this forum relating to usufructs on real property but my usufruct is over a share portfolio. My understanding is that a usufruct separates the income from an asset and the right to use that asset from the other rights inherent in the asset. I think that means in theory that a capital gain cannot arise as the asset cannot be sold without bringing the usufruct to an end. In such a case, one would expect the entire sale proceeds to accrue to the nu-proprietarie and therefore the capital gain to accrue to him also.
However, with a share portfolio, there is obviously a provision that where the composition of the portfolio changes, it is treated as the same asset as that on which the usufruct was originally granted. Accordingly treating the gain as the nu-propertaire’s would be fairly horrific in my case as the nu-proprietarie is UK resident but cannot obtain use of the funds until the death of the usufructer. Indeed in my client’s case, the usufructer who originally owned the shares has power to revoke the gift during her lifetime so my client may ultimately see nothing.
I have seen a suggestion that HMRC apportion the gain between usufructer and nu-proprietarie in proportion of the value of their interests. That would suit me as the value of my client’s interest is undoubtedly nil because of the power to revoke. Whilst that might seem a pragmatic solution, it seems an unlikely one for HMRC to adopt, bearing in mind that in the vast majority of cases either the usufructer or the nu-proprietarie is likely to be non-UK resident and thus outside the scope of UK CGT.
It is also not attractive to me to regard the arrangement as an interest in possession trust because I suspect that would make my client the sole trustee, even though under the Deed of Gifts she has granted control over the portfolio to the usufructer (the donor).