I am very curious as to exactly how HMRC were allowed and indeed were enabled to make the following statement: Tony Key Nottingham Trusts and Estates in 2012:
“It is neither necessary nor helpful to consider the extent to which French law does or does not recognise or accept the concepts involved. We are concerned solely with establishing the tax consequences of a fictional application of UK law to a disposition made by an individual who is deemed domiciled in England. Whatever those consequences may be will govern how the dispositions should be taxed for IHT purposes, but such treatment cannot and does not upset the position that exists in the real world.
I should add that this approach is entirely consistent with the approach HMRC has adopted to usufructs over the years. Prior to March 2006, professionals were only too happy to accept that a usufruct should be treated as creating an interest in possession settlement for IHT purposes so that where the spouse was given an usufruct with the bare property passing to others, exemption under s.18 applied. This very same treatment will apply to the small parcel of land in … that was not transferred to …'s daughters – I understand that Mrs … has taken a usufruit over this land so she is treated as acquiring an IPDI in that property under s.49(1A)(a) and the property is exempt from IHT. But it now forms part of her estate and will be subject to IHT on her death.
You may have seen that there was support for this approach in an article contained in issue 6 of the 2011 series of Private Client Business.”
On what basis did a Firm of Chartered accountants take the liberty of laying down a tax treaty credit scheme as if it were the law, going against a fundamental common law principle of jurisdiction, or rather lack of it ?
That aside, No one appears to have questioned how the United Kingdom sovereign policy of not taxing foreign land prior to the Second World War changed to a policy of applying English (not as Mr Key puts it UK) laws of property, whether by fiction or otherwise, to land outside the United Kingdom. Parliament simply has no sovereignty or jurisdiction to do so, other than as between England Scotland Wales and Northern Ireland. The LPA 1925 itself only allows its application to England and Wales, not to any other part of the United Kingdom or for that matter outside it.
Had the Firm of accountants done some research before massaging the two tax laws and a treaty to achieve a tax credit funded IHT solution as opposed to two dry transfers, they would have understood that even in the Tax Treaty context the United Kingdom recognises the concept of a usufruit in all of its treaties with France and applies it to define the tax nature of the income rising from it: agricultural or otherwise. Further research would have revealed that the reason is that the United Kingdom has no legal jurisdiction to do otherwise. That is why the tax treaties are drafted so as to designate the immovable property rights to which they apply and apply the law defining them;, not that of the country of residence or domicile of the “owner” of the right in rem.
s. 43(2) ITA 1984 in fact does not permit this treatment. The fiction to which Mr Key refers does no more than remove the prior common law and therefore the estate duty block on treating foreign land held in trust as an immovable i.e. land, not a trust right. See re Berchtold and the judgment of the House of Lords in Philipson-Stow.
What is a matter of grave concern is that the Accountants concerned had no thought or even no idea that the dismemberment by way of lifetime gift, as opposed to will or succession, would be so paralysed by their slick attempt at massaging a Treaty credit in a succession duty context.
At the very least, HMRC should have been reminded that their concession could only be an administrative tolerance in one specific set of Treaty circumstances but not the general law.
The irony is that the assertion made “but such treatment cannot and does not upset the position that exists in the real world” is entirely undermined by the fact that the real world treats the French usufruit as a real right in rem, and not the singularly ephemeral personal right in a fictional settlement which Mr Key failed to define. The Law of Property Act 1925, in the real world to which he refers, does not apply to France, or for that matter Scotland or Northern Ireland. In contrast to the Proper Liferent, the Scottish Improper Liferent is but a Kilt with woolly equitable underwear. In the real world, Parliament does not and indeed cannot legislate so as to redefine foreign land law rights as being English, even for tax purposes.
What is equally unclear is how a tolerance, as such it must be named, in relation to one set of legislative provisions, those prior to 2006, should now have been allowed to crystalise into a quasi- legal view in relation to relevant property trusts with entirely inappropriate and what is more, ill-defined tax treatment. Perhaps the Firm of accountants should have taken some proper “real” legal advice before devising their tax credit wheeze and giving fiscal influenza to lifetime gifts of the nue-propriété to leave the real right of the usufruit in the legal, not the equitable estate of the donor.
Peter Harris