Usufruits and the making of a "view"

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

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The turning point was at s. 36(4) and (5) FA 1969 which added (e) and g) to s.2(1) of FA 1894. inserting the Proper Liferent, not as a settlement under s.22, but by considering it as assessable property to which the deceased was entitled. No attempt was ever made in the Estate Duty legislation to treat a Proper Liferent or a usufruit as a settlement.

It also added by s.36(5)(i) a general definition of “settlement” which included the following phraseology:

“(i)(bb) any disposition regulated by the law of a territory outside Great Britain which would constitute a settlement within the meaning of section 22(l)(i) of the Finance Act 1894 1894 c. 30. if it had been regulated by the law of England or, as the case may require, of Scotland;”
S.22(1)(i) FA 1894 read " The expression “Settlement” means any instrument, whether relating to real property or personal property, which is a settlement within the meaning of section two of the Settled Land Act, 1882, or if related to real property would be a settlement within the meaning of that section, and includes a settlement effected by parol trust".

One point that is obvious is that HMRC have treated the French usufruit as a “non-trust arrangement” despite that fact that only trusts or at best “trust-like arrangements” are caught by the definition of a settlement in s.43(2) ITA 1984. A usufruit could never have been considered as a Settled Land Act trust, even under the 1925 Land legislation.

It is only in relation to Scotland that Proper Liferents are also treated as settlements and settled property.

Ss 4 reads:

In relation to Scotland “settlement” also includes—


© any deed creating or reserving a proper liferent of any property whether heritable or moveable (the property from time to time subject to the proper liferent being treated as the property comprised in the settlement);

and for the purposes of this subsection “deed” includes any disposition, arrangement, contract, resolution, instrument or writing."

The term “also” is the key. Having scotched the previous clear distinction between Scottish civil law and the common law of England and Wales by the phrase “regulated under the laws of any part of the United Kingdom” in s.43(2) ITA, the draftsman attempted to remedy the position by inserting ss.(4), but failed to address the remainder of the situation in relation to foreign “non-trust” dismemberments.

Proper means one’s own, not property belonging to a trustee - improper. The usufruit is a right in rem proper to the usufruitier in the same manner as a legal estate, not a servitude, as some would have for example the Jersey usufruit over Jersey land.

The proper interpretation of 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;…" can only be that, as the proper liferent is a real right in rem over Scottish land or movables, the French immovable right in rem cannot be regulated by the law of England and Wales to create a fictional settlement by rendering it a personal right or right in personam.

Put squarely in plain English how can Parliament be presumed, even by administrative edit, edict or view, to have extended its powers to legislate over land outside its sole jurisdiction over foreign land in a mere money bill without having alerted Parliament to the fact that it was doing so? Taxing a trust over it is one thing, saying that its in fact a trust with trustees when it is not and there are no trustees is entirely another.

Peter Harris
Overseas Chambers

The other point which HMRC’s position or “view” attempts to ignore is that, for there to be any form of settlement, someone must hold the property right for someone else by way of succession or subject to a contingency of the type set out in s.43(2) ITA.

In other words, a beneficiary is in effect entitled to the asset and is treated as absolutely entitled if there is no one else in competition with them.

The usufruitier in French law is absolutely entitled to the usufruit, a French right at law, in rem. it is not a personal right enforceable against the nu-propriétaire. The nu-propriétaire is the absolute owner at law. that right is also in rem.

There is therefore no “settlement” of either legal asset, there is also no “contingency”.

Mr Key’s ideas of “helpfulness” are irrelevant. The 1925 Property legislation does not apply to French land, and s.43 (2) ITA gives him no right to be helping himself to it, unassisted or not. Mind you, he hadn’t apparently heard of or understood the principle behind the rule in Saunders v. Vautier.

That is why s.43(2) ITA can only be interpreted as removing the English common law conflicts blockage requiring foreign land held in an express English trust to be an immovable : Philipson v. Stow and incidentally re Berchtold which treats English land held in trust as an immovable.

Their Lordships in Philipson-Stow addressed the following statutory provision:"By section 28 (2) of the Finance Act, 1949, property passing on the death of a person "shall be deemed for
the purposes of estate duty not to include any property passing on the death which is situate out of Great Britain if it is shown that the proper law regulating the devaluation of the property so situate, or the disposition under or by reason of which it passes, is the law neither of England nor of Scotland and … (c ) that the**property so situate is by the law of the country in which it is situate, immovable property."

Parliament did not give HMRC a blank cheque to cash in on worldwide realty in either 1975 or 1980 in relation to CTT, nor in 1984 re IHT.

If you look at s.36(5) FA 1969, the full complacency of the CTT draftsman of Clause 1(2) Schedule 5 FA 1975 which later became s.43(2) ITA becomes apparent. The Scottish Proper Liferent was not included in the section at s.36(5)(a)(iii) FA 1969 with an entail as there is no succession to it, as there is none to the French usufruit, unless expressly stipulated to be successive in the acte or deed creating it. No property “passes on death” on the extinction of a usufruit on death.

The Proper Liferent had to be inserted into section 2(1) FA 1894 as a new subsection (g) by s.36(3) FA 1894 as a separate exceptional treatment, but not as a “settlement”. HMRC’s assertion that the French usufruit is a “settlement” under s.43(2) ITA given its ss.(4) simply does not work.

Peter Harris

The comments on the post have been amended on the TDF Website to include a more detailed analysis of the consequences of the changes subsequent to the Finance Act 1969 to the English/Scottish law dichotomy in inherent in s.43(2) ITA .

Under Estate Duty, HMRC were blocked from asserting English trusts over land over civil law immovable property rights abroad by the distinction drawn between in England and Scotland in section 34(5)(a)(i)(bb) FA 1996 “… if it had been regulated by the law of England or, as the case may require, of Scotland.” This was their reaction to Philipson-Stow. HMRC later seems to have attempted to extend the law of England to civil law jurisdictions by referring to a deemed regulation by “the laws of any part of the United Kingdom” in the later development.

At no time in the 1969 legislation were Scottish Proper Liferents treated as settlements, merely as a distinct form of settled property. They were addressed specifically at s.36 (2) FA 1969 which added s.2(1)(g)(ii) to FA 1894. The UK Parliament has jurisdiction in fiscal matters over Scotland, and was able to pull that constitutional rabbit out of its crown. It has no such jurisdiction over foreign land.

At that point in time, 1969 there was no manner in which a French usufruit dismemberment could be considered to be either a settlement or settled property. It was only by the underhand compression of Scotland into the United Kingdom in 1975, which was noticed by the opposition members of Standing Committee A, but which the Government avoided giving the reply that it was to extend English concepts of settlement of land to the entire planet.

HMRC should be held to an interpretation of the wider “regulated by the laws of any part of the United Kingdom” as being to the laws of Scotland in the context of a foreign civil law, and certainly in relation to foreign civil law immovable rights not held in express trust.

In short, either Dr Gilbert lied by omission to Standing Committee A in 1975, or HMRC have deliberately gone beyond the intention and what is more the jurisdiction of Parliament in compiling their current “view”.

That is why the issue of the massaging of the tax credit system under the treatment of the usufruit granted by will or on death pre-2006 as an IIP, and its replacement by a relevant property régime was wrong and should be treated as no more than an administrative tolerance.

It is also a reason why most professionals are now feeling uncomfortable with relevant property régime being applied to such dismemberments. The property taxation does not match the laws of property applicable. It is at the point where purely French transactions, between a French family over French land are now being hamstrung by the potential presence of a family member in the United Kingdom.

Common sense dictates that the law of the land determines the property rights as to that land, not some foreign elucubration as to the doctrine of conversion.

The civil law of Scotland should have been applied to its classification, even within the concept of “the laws of any part of the United Kingdom” and the French immovable right should be been charged at its real value on death i.e. nil as it extinguishes and cannot be succeeded to (there is no transfer of value). It is also why any disposals within the seven years preceding death should be given their French valuation, and not treated as a transfer of the whole property, as HMRC are currently attempting to argue.

The case still requires it.

Peter Harris

www.overseaschambers.com