Italian usufruct - UK CGT base cost

An Italian domiciled/ UK resident client (Mr X) is selling shares in an Italian company (which owns an Italian Property). We need to establish the base cost of those shares for UK CGT purposes and the background to this is not straightforward as historically the shares have been subject to a usufruct.

Mr X originally acquired only a bare interest in the shares, with his Father holding the usufruct to the shares. As such, what Mr X then paid at the time was quite low.

When Mr X’s Father died several years later, Mr X became the full owner of the shares. We are hoping that we can find a basis for saying that at that point, for UK CGT purposes there was a disposal of the full interest in those shares by Mr X’s father, to Mr X, and that such a value could be said to be a high amount, closer to the full unencumbered value of those shares.

However, we would appreciate views on whether there would indeed be an uplift in the base cost of the shares on the death of Mr X’s Father’s?

Some commentary suggests that Mr X would be deemed to have acquired the assets at the date of the deceased’s death for consideration equal to their market value at that date, but does anyone have any experience of this situation or links to reliable commentary on this point?

Any assistance is greatly appreciated

Thomas Barker
Charter Tax

The traditional approach for CGT purposes has been to rely on the uplift to market value provided for the Scottish proper liferent in s.63 (2) TCGA 1992.

The usufruit is assimilated to it in the IHT/CGT manuals.

The distinction arises as a usufruit dismemberment is not, and never has been, a settlement for CGT purposes.

It is therefore to be treated as the reduction to nil value of a property right which extinguishes at nil value on death, with the nue-propriate increasing in value, over time, in inverse proportion to 100% on death.

If you need a hand let me know.

Peter Harris

www.verseaschambers.com

Without wishing to overwork the point, the CGT treatment fo a usufruit is a realistic one. it is purely the attempts made to stretch s 43 ITA by administrative pseudo-doctrinal extension that have clouded an otherwise simple situation.

Had HMRC contented itself as the continentals do with treating the carve out of separate legal property rights in the same manner as the House of Lords on reservation of benefit , there would not be this degree of doubt.

This needs to be reiterated.

Peter Harris
www.overseaschambers.com