Capital Gains Tax on a usufruct

Trusts Discussion
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Does anyone know how HMRC treat a usufruct for CGT purposes? The only reference in their CGT manual is to CGT on death where they say that a usufruct is similar to a Scottish proper liferent. In their IHT manual, they say they regard a usufruct as an interest in possession trust but that their view is controversial. There have been posts on this forum relating to usufructs on real property but my usufruct is over a share portfolio. My understanding is that a usufruct separates the income from an asset and the right to use that asset from the other rights inherent in the asset. I think that means in theory that a capital gain cannot arise as the asset cannot be sold without bringing the usufruct to an end. In such a case, one would expect the entire sale proceeds to accrue to the nu-proprietarie and therefore the capital gain to accrue to him also.

However, with a share portfolio, there is obviously a provision that where the composition of the portfolio changes, it is treated as the same asset as that on which the usufruct was originally granted. Accordingly treating the gain as the nu-propertaire’s would be fairly horrific in my case as the nu-proprietarie is UK resident but cannot obtain use of the funds until the death of the usufructer. Indeed in my client’s case, the usufructer who originally owned the shares has power to revoke the gift during her lifetime so my client may ultimately see nothing.

I have seen a suggestion that HMRC apportion the gain between usufructer and nu-proprietarie in proportion of the value of their interests. That would suit me as the value of my client’s interest is undoubtedly nil because of the power to revoke. Whilst that might seem a pragmatic solution, it seems an unlikely one for HMRC to adopt, bearing in mind that in the vast majority of cases either the usufructer or the nu-proprietarie is likely to be non-UK resident and thus outside the scope of UK CGT.

It is also not attractive to me to regard the arrangement as an interest in possession trust because I suspect that would make my client the sole trustee, even though under the Deed of Gifts she has granted control over the portfolio to the usufructer (the donor).

Robert Maas
CBW Tax

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I have been told that HMRC practice on this point has not always been consistent, but the Manual is right to say a usufruct is not a trust for CGT purposes, because no property is held “on trust”. See my Taxation of Nonresidents and Foreign Domiciliaries 2020/21 para 102.18.2 (Usufruct: CGT). That does not contradict the HMRC view that a usufruct is a settlement for IHT, as the definition of settlement for IHT is a different one.

James Kessler QC
15 Old Square
Lincoln’s Inn

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You can have a usufruit over a portfolio or a mass of assets. I have used that technique in the past and proposed it to French colleagues who found it very useful as it exists in Jersey and Guernsey law.

Which law governs the property which has been dismembered, is there a deed of dismemberment? There is a significant difference for example between the Dutch, the Italian version, the Belgian version and the French version in relation to whether the usufructuary can dispose of the capital and to what extent and under what limitations. That point needs to be checked in any CGT matter as the usufructuary may incur a debt to the nu-propriétaire in the form of restitution of value at the end of the usufruic’s term .

Please note that the usufruct is a right in rem , whether it be in movables or immovables.

Speaking from the French viewpoint. Generally it is the nu-propriétaire who holds the right of abusus i.e. disposal and destruction of the chose upon or in which the rights in rem are constituted but the usufruitier can sell their right independently as a carved out right in rem . The usufruitier generally has to notify the nu-propriétaire of the transfer. The usufruitier does not have the right to sell the whole asset, only their right in rem.

You may need to check the instrument or deed creating the usufruit , if it exists, as that might alter things, particularly in relation to the way in which the usufructuary dismemberment was carried out and created. Sometimes an able French notary will devise a quasi-usufruit for clients on a sale of a property and convert the proceeds into investments, which is slightly different and starts to resemble a Dutch usufruit, as the usufruitier can draw down on capital and gains. In that case the quasi-usufruitier might be the sole person liable of the putative gain under UK principles, subject to an obligation to restore.

Under French law, the gain ends up being apportioned between the nu-propriétaire and the usufruitier by reference to the French statutory table at article 699 CGI, unless there is a convention in the usufructuary dismemberment enabling the contrary. That table is legal, it is not a mere actuarial basis as is sometimes fatuously argued by HMRC to deflect criticism of their attempts to evade it. It applies not only to gift and succession duty, but in registration duty on transfers for consideration/ à titre onéreux . It is therefore is used in contractual matters of sale, there is no other juridically final method other than an economic valuation, which is only rarely accepted in cases relating to commercial property.

Please note that the capital has to join in the propriété in the chose on death undiminished and intact, and the usufruitier ’s estate is liable for any depreciation in its value or substance. You need to check whether the usufruit appropriation has been mutated into a quasi-usufruit or not by deed, for example on the sale of an immovable or a share in an SCI as that will alter the position considerably. The usufruitier ’s estate on death will incur a debt to the nu-proprietaire . The issue is that there is no “settlement” and the right takes effect in rem, not in personam. The usufruitier takes the dividends in specie.

Please give me a ring if you need further assistance in the UK. I remember our con at 3 Temple Gardens Tax Chambers in 1999 on a different French matter.

James is as ever entirely correct. Lord Wilberforce said in a CGT case Roome and Deeme v. Edwards TC Vol 54 at page 389 §G that “A settlement must be a situation in which property is held in trust”. Whilst I understand that certain, including the author of Clarke’s Offshore Tax Planning say that a usufruit is a settlement, offering no authority or explanation for that assertion, I hold to Lord Wilberforce’s currently undisputed statement of English law as it stands. S 43(2) is an anomaly, and the after effects analogy drawn by HMRC from the deeming provision, to cite Sir Noel Coward are certainly not divine.

Peter Harris
Overseas Chambers

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If you wish there is a specific s.63 (2) TCGA statutory uplift for the Fiar for CGT purposes following the extinction of the liferent on the death of a Scottish proper liferenter, which also undermines the propagation of the s.43(2) weed into other areas.

Peter Harris
Overseas Chambers