Usufruits and HMRC Technical. Burning coals to Newcastle?

(Peter Harris, Barrister, Overseas Chambers ) #1

The concept is that of a wasting “asset”.

It is clear that the variety of species of usufruit in Europe is leaving Mr Davidson and his team in Newcastle with difficulties in comprehension, which is leading them to make unfounded and totally incorrect and pseudo-academic generalisations out of Roman law, rather than actually addressing the modern developments in each European state. For example, asserting that the latin nu-propriétaire being the “owner” of the abusus, or the right of destruction which in some warped manner would entitle the French nu-propriétaire to sell the whole propriété rather than their limited right. Given that French law ensures that each legal property right is only sellable by the holder, and not by someone else, the assertion by Mr Davidson that it does not is incongruous, and technically abusive. Inferring from a falsehood that either the usufruitier or the nu-propriétaire has the administration of the whole of the property - pleine-propriété- as opposed to that of their limited right on that basis, cannot be qualified as anything else but an abusive practice.

The Treasury Solicitor has evidently persuaded Mr Davidson and Mr Key to allege, wrongly, that the nu-propriétaire of a French immovable can sell the usufruitier’s rights as well as the nue-propriété without their consent, thus inferring that there is a form of quasi-trusteeship equivalent of a settlement. I cite one previous correspondence, which is being repeated like a scratched record:

“The owner can divide these rights into two groups: the usufruit which will include the first two rights and the nue-propriété which will include the third. This splitting of property rights between being able to enjoy the benefits of the property, but not being able to dispose of it; and the ability to alienate the property, is not so dissimilar to the separation of the beneficial and legal titles to property recognised in English law.
In disposing of the properties to his daughters whilst retaining a usufruit over them, Mr A . separated, for the remainder of his life, the right to sell the property from the right to use or enjoy the benefits of the property. The question then is how the law of any part of the UK would view a disposition that gave rise to such an outcome.
Although there is no formal trust structure or appointment of trustees, English law would recognise the daughters as being the legal owners of the properties, holding them as trustees for the benefit of Mr A for his life, with remainders to themselves. This gives the element of succession required by s.43(2)(a) and in such a context Mr A, as the provider of the funds, would indeed be the settlor under s.44(1).”

English law in fact does no such thing. The assertion that it does is a blatant falsehood. The operation of English law is to apply principles of situs to determine the type of asset and only then conflict and private international law, it does not presume there to be a trust. The process of English private international law and conflict is set out in Philipson-Stow v. IRC, (1961 AC 727 which does not support Newcastle Technical 's position at all. It in fact contradicts it, and s.43(2) ITA in fact accept that operation of “law”, by referring to it.

What is more the fact that the nu-propriétaire can operate and dispose of their legal interest independently of the usufruitier was shown both by articles 621 and 815-5 Code civ, and a 1989 decision of the French Cour de Cassation 1st Civil Division of 19th December, 1989. The nu-propriétaire can in fact dispose of the nue-propriété of which he alone is the absolute owner without the agreement of the usufruitier but not the pleine-propriété, in which the usufruitier has a separate legal interest. There is an expanding market in France and in Spain for the sale of nue-propriété legal interests by pensioners in France seeking an equity release over their homes without the inconvenience of going to a bank or finance company. In short, there is no room at law, whether English or French for the HMRC solicitor to lead Mr Davidson to assert a fictional settlement over the whole propriété, particularly on the sole basis that he cannot think of any other way of addressing it. There can only be a “settlement” over the entire “property”, la propriété, if one party, the alleged trustee has a right to sell the whole. In the case of a French usufructuary dismemberment that is simply outlawed. They do not. In fact, English law does “regulate” the rights arising from the disposition by way of a usufructuary dismemberment at law, but not as a form of settlement. I will abstain, if I may, from revealing that right.

Whilst it is understandable that a civil servant, with the experience of Mr Davidson, can accumulate a degree of knowledge of a foreign legal system by experience, it follows that if that received experience is wrongly informed, it is inevitable that his analysis of any given foreign set of property rights will be incorrect when taken against the statutory fiction of s.43(2) ITA 1984, which has its limitations. However, it is clear that neither the Treasury Solicitor nor HMRC Newcastle have ever taken foreign counsel’s advice on what a usufruit actually is in any given jurisdiction, or if they have done so have deliberately ignored it and are not prepared to alter their position. Treating s.43(2) ITA as a form of fiscal fulcrum to move otherwise legal rights into an imaginary settlement world was not what Parliament had in mind in 1975. A foreign property law interest governed by the _lex rei sitae cannot be reduced to an imaginary settlement by holding a fiscal telescope to the other blind eye; particularly when it already is “regulated” by English law as a legal right. S.43 (2) ITA 1984 was the redressing of an Estate duty point as to the application of the lex rei sitae until the foreign land was sold following the House of Lords decision in Phiipson-Stow v. IRC [1961] AC 727. There appears to be no Parliamentary documentation in 1975 to the contrary, The only fiction allowed appears to be that relating to the second limb of the fiction, namely that of administration of the whole property , which is irrelevant to a usufructuary dismemberment.

Even the Standing Committee A minutes of the Finance Bill 1975 do not support the imaginary overlay of an instantaneous settlement over foreign land, an immovable as opposed to a movable.

May I suggest to my colleagues that great care be taken not to take short cuts in analysis and description, as that has led to Mr Davidson’s assumptions being wrongly orientated, with substantial injustice and over taxation being wrought. It is now at the point where rather than listening to informed reason, he is now seeking a test case to prove himself and his over-extension of the scope of s.43(2) ITA 1984 right. I would trust that HMRC would pay the whole costs in any such test case scenario.

It is claimed that the case of Dreyfus TC Vol XIV 560 is not relevant, when it in fact provides the limitation on any use of the Taxpayer’s and the Courts’ imputed imagination. It is difficult to see how a French national’s imagination can be encumbered with English, let alone HMRC’s warped view of what a “settlement” actually is when dealing with a French immovable right which they know not to be any form of imaginary settlement but a wasting legal asset! English law as implemented by the Courts, not HMRC, will give full effect as to the substance of the foreign property rights, in particular when these are not trusts. What is more, he refuses to accept that HMRC has to provide a legal analysis of why their imaginary “view” is correct by reference to both foreign law and any authority, statutory or otherwise in any one of the United Kingdom jurisdictions.

it is clear for example, that Dutch law enables the Dutch usufructuary to consume the property as a whole without the equivalent of the nu-propriétaire having any claim against their estate. On the other hand, a Belgian or a French usufruit does not bear that right, and the usufructuary’s estate can be compelled to account to the nu-propriétaire for the substance consumed. That is the source of the development of the French quasi-usufruit. There are therefore substantial differences between legal jurisdictions which are not reducible to a lowest common latinate denominator, and certainly not by a slack approach to the issue by reference to a trust.

It is curious that HMRC or the Treasury Solicitor can pretend to any authoritative knowledge of French law of property when any relevant article in the Code civil disables that pretence, and then seek to assert that it is no longer their problem, but the taxpayer’s.

Is it not time that the imaginary game of quiddich invented by HMRC Newcastle after the Scottish Proper Liferent fiasco in 1978, over EU property rights which are covered by the protection under the Freedom of movement of capital be brought to an end, even if it is just prior to Brexit? The Treasury Solicitor’s broomstick is certainly not up to standard when placed against the very law which they are attempting to apply. The statute does not say the municipal law of any part of the United Kingdom, whatever those may be. it therefore includes the private international and conflict of laws applied by the Courts, as opposed to Parliament.

Peter Harris

(Peter Harris, Barrister, Overseas Chambers ) #2

Reverting to the principles under the Bill of Rights and the limitations on Parliamentary jurisdiction.

A foreign immovable property interest, taking effect at law, which is not held through a settlement and which remains governed by the _lex rei sitae cannot be reduced to an imaginary settlement by holding a fiscal telescope to the other blind eye; particularly when it already is “regulated” by English law as a legal right - here a chose in action. That is contrary to the private international laws of the jurisdictions comprising the United Kingdom.

When seen in the light of prior private international law and practice, the first clause of the second paragraph to s.43 (2) ITA 1984 “or would be so held or charged or burdened if the disposition or dispositions were regulated by the law of any part of the United Kingdom” is no more than the redressing of an Estate duty issue as to the application of the lex rei sitae to a foreign immovable right held in trust until the foreign land was sold. That limitation was identified by the House of Lords in Phiipson v. Stow. In short, s.43(2) does not go as far as HMRC are currently attempting to make it go. That clause was required following the House of Lords decision in Phiipson-Stow v. IRC [1961] AC 727 so as to extend the IHT basis to inclide foreign immovables held in trust. It was not intended to go further and to render any disposition of an immovable situated anywhere held otherwise than under a trust, a settlement… There is no Parliamentary documentation extending the notion of a settlement to embrace a foreign immovable property interest where there was no settlement holding it. Indeed Dr. Gilbert when pressed by John Pardoe MP for an example in 1975 on the second clause, was only able to direct his example to the Liechtenstein entities covered by the second clause in the second paragraph of s.43(2) in his reply. He did not state clearly that the aim of Dennis Healey was to override the private international law to which the section itself refers in the “law of any part of the United Kingdom”. The only “fiction” permitted by that fiction appears to be that relating to the second limb of the fiction, namely that of administration of the whole property, which is irrelevant to a usufructuary dismemberment. Had it been more, Dr. Gilbert would have had to say so in 1975, as John Pardoe MP had raised the issue of constitutionality. A money bill cannot change the law of property of a foreign state or for that matter the principles of private international law regulating the legal status of a foreign immovable.

HMRC are currently ignoring the fundamental distinction between an immovable and the doctrine of conversion, and assuming that they have the right to convert any property in the world into an imaginary settled movable. Neither the Courts nor the taxpayer are required to stretch their imagination beyond the private international laws of En,gland and Wales which are referred to in s.43(2) ITA 1984, despite Mr. Davidson’s threatening fire and brimstone from the ninth circle of statutory missinterpetation.

HMRC’s current Nelsonian “view” is an abomination of prior and fundamental Parliamentary principle that Parliament does not legislate over foreign immovable property interests. I cite the Attorney General, Sir Donald Somervell in 1936 on the Finance Act 1936: “It [immovable] means land or such interests in land as are regarded as immovable property by the law of the country where the land is situate. By a general understanding between nations, no nation in the past has ever attempted to tax land which constitutes part of the territory of another country. Therefore, foreign land has always been outside the Death Duty or Estate Duty net. It is simply a proviso that nothing in the Clause is to operate so as to charge with duty any property which by the law of the country in which it is situate is immovable property. It simply excludes foreign land.”
Whilst is is clear now that the French and the British tax each others land after WWII, with credit, they only do so on the basis that the other’s immovable rights are respected as such. It is not clear that either State has had the arrogance to go so far as to treat the other’s land as fiscally conveyable under the methodology of the laws of the state taxing the deceased. At law, these are not movable rights, even with an overlying trust (under Philipson-Stow) . It is to that eventuality which the first clause of s.43(2) paragraph 2 is addressed, not to immovables which are directly held , so as to eliminate the issue as to being held “improperly” in a foreign or English trust.

Peter Harris

(Peter Harris, Barrister, Overseas Chambers ) #3

Whilst HMRC are a non-ministerial department, they are directly answerable to the First and the Second Lords of the Treasury, that is the Prime Minister and the Chancellor of the Exchequer.

Whilst the Prerogative in the Prime Minister in relation to international relations is clearly established, that does not entitle or enable HMRC to extend the actual territorial jurisdiction of the Prime Minster and the Treasury to immovable property and immovable property rights physically outside the jurisdiction of the Crown of the United Kingdom saving assent by the foreign state involved.

Nor does it require the Courts to which HMRC are answerable proceed to an effort of imagination over an immovable or an immovable right outside their jurisdiction and over which they can exert no judicial power.

The Law of England and Wales, and subject to Scottish and Northern Irish variants, of any part of the United Kingdom is that it is the Court where the immovable is situated that has outright power derived from State sovereignty to adjudicate over the immovable “chose” to which the foreign law of property applies.

That was the Law before Philipson-Stow, which their Lordships simply reiterated and remains the Law of any part of the United Kingdom to the present time.

To quote Mr. John Pardoe MP at §1735 Standing Committee A 17th February, 1975:

“The Bill asks us to imagine, and presumably asks the Courts to imagine, that the property would, be so held charged or burdened by United Kingdom law [his error: “the law of any part of the United Kingdom”], whether it was or not - in other words, as if it were. …”

That remark, and Dr. Gilbert’s reply can only be based on an assumption that the property right in question is characterised as a movable or as a right subject to an express trust. Put simply the English courts have no imagination to exercise, as it is a matter of law beyond living memory if not immemorial that the English Courts will only recognise what the foreign immovable right is. Dr Gilbert replied with an example of a movable nature by reference to the movable rights created under Liechtenstein anstalt and foundation. Those are entities, not immovables.

Neither the Prime Minister the Lord Chancellor nor the Chancellor of the Exchequer have an authority to treat a foreign immovable right as if it were a settlement when it has no legal similarity to one.

The usufruitier cannot be assimilated to a tenant for life as they cannot sell the whole property, merely their immovable right in rem. In other terms, they cannot sell or dispose of the chose itself. they can only dispose of the usufruit. Disposing of the property or the chose upon which these rights bear is the sole right of the nu-propriétaire.

Peter Harris

(Peter Harris, Barrister, Overseas Chambers ) #4

HMRC’s main error is assuming that it can automatically interpose an English settlement of land over immovable property in France.

Firstly the so called “scope” of application of the Settled Land Act 1925, and every other Act relating to land is strictly limited to England and Wales. HMRC have to prove a settlement to bring otherwise legal rights within s.43(2) ITA 1984.

Secondly, it is fundamental for any settlement of land to be made is that the assets in question are “limited in Trust” ( Megarry Manual of he law of Real Property Sweet & Maxwell 1946 ed. p. 189). To assert, as HMRC have to do, that a trust can be applied to French land so as to regulate it (as per s. 43(2) §2 ITA 1984) is pure folly. If there is no trust there is no settlement and s.43(2) ITA falls out of fiscal heaven to the 9th circle of Hell.

As the immovable property is outside the Realm and therefore outside the jurisdiction, capacity of enforcement and adjudication of the English Courts, let alone that of Parliament, HMRC’s imagination should be contained within and limited to the realms of personalty not foreign realty, or dare I put it reality.

As the final technical coup de grâce, the doctrine of conversion of land to personalty was abolished in s3 Trusts of Land and Appointment of Trustees Act 1996.

Peter Harris

(Peter Harris, Barrister, Overseas Chambers ) #5

HMRC’s fundamental error is that the usufruitier, in other words the individual whom they would reduce to the status of a tenant for life under a deemed settlement of land does not have the power under s.36(1) Settled Land Act 1925 to sell the whole land: here the chose known as the propriété. as a whole which is distinct from the usufruit and the nue-propriété. There is no separate trust instrument or vesting instrument required under French conveyancing law, nor is it possible to adduce one on the basis of a mere Money Bill, without any proper debate over this administrative extension attempting to apply a régime applicable to movables so as to take effect over land outside Parliament’s sovereignty the jurisdiction,of the Courts of any part of the United Kingdom, and therefore outside the jurisdiction of the Tax Tribunal and inevitably of HMRC’s ability to requalify and fictonalise: the authority for that is Philipson-Stow [1961] AC 727.

The usufruitier can only sell their usufruit independently. Whilst this is unknown in English law, it is known in Scottish law as a Proper Liferent. The nu-propriétaire can also sell their right in rem the nue-propriété, but not the usufruit. He can only sell with notice to the usufruitier. The notice is to enable the usufuitier to revert to the new nu-propriétaire at law, not in “equity”.

The usufruitier is not therefore a tenant for life and cannot be assimilated to one. There is no therefore no settlement, and therefore no “trustee”. It can only be treated as two distinct property rights at law, and s.43(2) ITA 1984 is not in whatever “scope” is applied to the patch over the eye.

It is not a transfer “to wife for life and to issue absolutely”.

It is to the nus-propriétaires absolutely, subject to the wasting legal asset or term of the usufruit.

It falls out of the scope of the settlement charge as non-settlement because there is no settled property. It is not a trust-like arrangement.

Finally the issue is governed not by some obiter fiction distilled from a comparative law elixir derived out of Memec’s silent partnership environment. The English and British laws generally require that the foreign property right, interest or structure be given their full affect under the governing foreign law, not under a comparative. That was settled by the Court of Appeal in Dreyfus 1929 TC VolXIV page 560 which Memec did not overrule. Dreyfus was not even mentioned in argument. For those with short memories, Memec only concerned a Treaty interpretation, not a matter of general law and interpretation of foreign property concepts.

The Court of appeal was able to rule on a foreign item of personalty, an interest in a _société en commandite_and did so by giving the rights contained in it their full effect under French law in a British supertax environment but it would certainly have ruled that it had no authority or jurisdiction to adjudicate in such a manner on a foreign immovable right in rem.

Memec is no authority for overriding foreign immovable property rights outside the personal and physical jurisdiction of the Revenue and what is more the English Courts and finally Parliament. Again see Philipson-Stow.

“A pox on” such comparisons, with such literal authority as may be gleaned from Twelth Night.

Unless the courts and HMRC pay due respect to foreign property rights as per Dreyfus, there is lessening hope for London as an international forum for arbitration and litigation in a post-Brexit scenario.

Peter Harris