I am being asked for opinions on certain issues which have been raised by solicitors in assessing whether a usufruit falls within s.43 ITA 1984 or should be dealt with as a French droit réel immobiler, a French property right at law.
Firstly it is clear that the definition of a settlement in s. 43 (2) et seq ITA 1984 simply does not catch a droit réel immobilier and certainly not a usufruit, which falls within that French category. It is not even comparable to a settlement, as there is no succession, and no contingency. Neither is it a burden or a charge. It therefore falls to HMRC to produce authority supporting its position, which it has never been able to do.
It is clear that following the English Court procedure for the treatment of foreign property rights, as a general matter at law and certainly in tax matters, the case of Dreyfus is of seminal importance. Memec is a side issue as it merely dealt with the incidence of a German silent partnership in a tax treaty context. Dreyfus sets out the common law position taken by the Courts generally at law, but applied it to tax matters. There the issue was a French SNC for the purposes of SuperTax. Those who are unable to access a copy of Tax Cases XIV 560 can consult it at the link provided. Memec and another indifferent first instance case of marginal relevance are cited in the Capital Gains manuals, not IHT, at CG31305 as authoritative to use comparatives, in other words treat the usufruit as a settlement. That is little short of a deliberate misrepresentation of what the cases actually held ouit of context, as for CGT purposes it is evident from s.68 TCGA that the property is not “held in trust”:
"Memec PLC v. CIR 71TC77, and R v CIR, ex parte Bishopp, 72TC322, in particular the remarks at 71TC112:
“What, in my judgment, we have to do in the present case is to consider the characteristics of an English or Scottish partnership which make it transparent and then to see to what extent those characteristics are shared or not by the silent partnership in order to determine whether the silent partnership should be treated for corporation tax purposes in the same way.”
Dreyfus holds in essence that a foreign property right or entity is to be given its full effect as to substance irrespective of whether the same or a similar right or entity exists in English law. The only slight, and frequently misunderstood exception for the application of the _lex fori as opposed to the substance of the foreign law was where the provision concerned, as opposed to the property right, was treated as administrative in nature. The error lies also in the attempt to assimilate that to the term “adminstration” in s. 43 (2) ITA 1984. Making the law up as you go along, without referring to the position inherent in the English Courts’ classification procedures as to substance is simply not correct. HMRC does not have the status of a juge des impôts, nor does the doctrinal statement for example by a minister have any legal authority whatsoever in relation to a matter of either English or a fortiori foreign property laws.
The recent Supreme Court judgment in Anson involving an American LLC shows the issues that over-inflating Memec beyond its ratio decidendi can give rise to. One cannot conveniently simplify foreign law by excluding its salient parts and get away with it. Here the legal position following the underlying principle in Anson is even clearer, as there is simply no point of comparison between a usufruit and a settlement. As the Settlement definition in s.43 purports to include property dispositions which are not trusts, to the extent that a foreign property right bears no comparison to a settlement it cannot be deemed to be such. As the usufruit at present benefits from the definition of a legal property right under the current EU legislation, by reference to the pre 1993 Capital movements directive, which is deployed by the CJEU as an interpretative indication, it is clear that there is adequate Treaty imperative to require that the property right be treated as such and not be transmogrified.
The substance of a usufruit simply has no equivalent in English law, except perhaps in relation to personalty. It is therefore axiomatic - and even Rowlatt J got that right in Dreyfus- that its substance should be respected and that it should not be denatured or reinvented à l’anglaise.
There is no obligation or reason to induct the “adaptation” theory which had to be brought into the EU succession regulation 650/2012 into the law of this Country.
So, contrary to certain apologists, the usufruit is not a term of years, as the nu-propriétaire, the owner, who cannot be qualified as a trustee, has significant personal legal responsibilities which are certainly not merely administrative for repair and even replacement of the asset. Neither does the English legal classification fit, as a Term of years as a Chattel real devolves, if by way of succession, as a chattel, therefore via personal representatives. There is no succession to a pure usufruit nor any requirement that a usufruit over French land pass by a personal representative, as no such obligatory passage exists in French law. A chattel real is derived out of real estate, whilst a usufruit is a self standing property right droit réel immobilier, which does not depend on an estate.
Neither is it a form of settled land as that estate does not exist in France, as again the Settled land tenant has the full repairing responsibility. As mentioned above, in France, at least part of that is the responsibility of the nu-propriétaire.
There is no element of succession as article 911 Code civil states that the usufruit extinguishes - at nil value - at death, with certain obvious exceptions for joint usufruits or expressly successive usufruits, which are of course successive, and the _usufrui_t value is taxed on the transfer on death.
Does that even approximate to giving recognition to the substance of the foreign property right? Certainly not.
There is therefore little excuse for seeking to find comparables when the English law is clear and apt to address the issue. S 43 is directed at English rights which take effect in equity, not foreign rights which can only take effect at law. Any review of Megarry and Wade in relation to the nature of law and equity in relation to interests in land will simply simply reinforce what I am saying. Dreyfus again in fact prevents the court in England from even hearing an attempt to put a foreign legal property right in the equitable dock when there is no administration involved!
I would simply add that a usufruit is certainly not a settlement for CGT purposes, and there is no reason why the Standing Committee A’s position that s 43 (2) as it now is, should now be extended from catching foreign trusts and trust-like structures such as anstalts and foundations, which require a form of administration to all forms of foreign property rights which do not. The latter are protected from that by Dreyfus, and there is no excuse for the complacent seeking of comparables. That was settled in Dreyfus in 1929, but the position has been fudged by HMRC’s attempts at extending Memec beyond its facts.
In sum it is not merely a question of knowing what the foreign law is, through a foreign law qualification, it is also a question of understanding what the English Courts’ position in their recognition is, and always has been.
To cite the Supreme Court in Ingenious “The common law is multi-faceted and remains the bedrock of the English legal system”. That includes the Court’s assessment and recognition of foreign property rights, to which HMRC is as subject as it was in Ingenious.
Given the recent update in the Inheritance Tax Manuals, at IHT27054 which hides behind a “valuation” heading simply abstains from producing any legible legal authority for the position taken such as a court judgment or a real analysis of s.42 (2) of the statute, I will be making a separate posting on that later. Having successfully parried an attempt by HMRC to impose English valuations, it would perhaps be unwise to take the Valuation procedure set out by HMRC as having statutory, in other words worldwide force, when they do not have the intellectual means or training to value an asset which is a product of French law.
It is strange that in this era of CRS, the tax authorities are not being held to a situs method of valuation of foreign property, as that would cut out any further possibility of administrative misbehaviour completely,
Having been Taxpayer’s Counsel responsible for one of the cases in which they were forced to abandon the valuation point, I can confirm that the entire procedure from start to finish has to be executed and followed in detail.
What is clear is that the final statement “The correct treatment of a usufruct for IHT purposes is not universally accepted” is incorrect. There is no statutory or legal authority produced by HMRC to justify its position as being correct at law. What is more, the request for a reference up to Technical if the taxpayer does not comply shows that the HMRC position is shaky.
Peter Harris