The Usufruit. It is neither a term of years nor a form of tenancy for life

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

In addition to rectifying certain typos, a sign of increasing age, I have added the following to the post on the TDF Webpage The Usufruit. It is neither a term of years nor a form of tenancy for life

That is why HMRC are clinging to the notion of the usufruit being, in their opinion, no more that an “interest in possession”, therefore has to be a form of settlement, despite the fact that it is not and never has been, anything other than a self standing property right as confirmed in the very minutes themselves. Pearson which they call in aid, was only decided in relation to interests in possession in settled property. Viscount Dilhorne’s judgment can only be read and understood as relating to a beneficiary who had the right to call for income from a trustee, not one in whom the income was already vested at law. How can a usufruitier claim income from anyone else, they are already vested in it. His final paragraph cannot be taken as authority for anything more, although HMRC appear to be trying to say that it does:

In my opinion the words ‘interest in possession’ in Sch 5 should be given their ordinary natural meaning which I take to be a present right of present enjoyment and as in my view the sisters on attaining 21 did not obtain that, this appeal should succeed and paras 1 and 2 of the commissioners’ determination should be upheld.

This can only refer to an interest in possession in what Visount Dilhorne was addressing : settled property.

The somewhat vague and entirely unlearned comments made in the Standing Committee A 1975 minutes as commented upon in 1980 show clearly that the usufruit was never in the contemplation of Standing Committee A as it was not within their legal or for that matter fiscal jurisdiction.

The main point which HMRC have skated over is that the case of Pearson which they cite is not authority for a proposition that any enjoyment of income renders the property right in question an “interest in possession”. The definition which their Lordships in Pearson was an interest in possession in settled property, not a property right at law. They also confirm that a usufruit, from their perspective is a “non-trust” interest akin to a Proper Liferent, which again is not settled property as such according to the definition of a settlement in s. 43 (2) ITA. s 43(2) ITA defines a settlement by reference to property being held in trust in succession or subject to a contingency. Leases for life/ terms of years under English law are expressly defined as settlements. However mere interests in income or enjoyment as such are not.

To cite the statutory “fiction” of s.43 and then assert that Memec allows them to find the closest comparable in English law - preferably a settlement - does not answer their difficulty. s. 272 ITA deals not only with “property” as a whole, but also with property rights, in other words “carve-outs” and the wider breadth of English property rights at law as amply described by Lord Hoffman in in the reservation of benefit cases. s. 272 ITA defines property as including property rights, such as the usufruit. Under Dreyfus, the English Court, the final arbiter in this case, looks to the substance of the foreign property right in tax matters, not to any form of its “administration”. The combination of s.272 ITA and Dreyfus puts paid ot HMRC’s attempts to redesignate under the case of Memec, which is more than distinguishable on its facts and as to its scope, limited to Treaty interpretation; not general substantive interpretation.

The librarian of the Scottish Law Society has not been able to locate a copy of the article in the Journal of the Law Society of Scotland referred to in Standing Committee A. I have had to rely on the Stair Memorial Encyclopaedia, which seems to confirm that the Fee is in fact conveyed to the Proper Liferenter, subject to an undivulged automatic reverter to the fiar. That appears to operate by the extinction of the Liferent at nil value, effectively paralleled by article 614 of the French Code civil and the automatic assumption of the full property right by the fiar, without any form of conveyance or succession. That is a Civil law issue with which most English lawyers will have to admit unfamiliarity, and is not the same manner of creation as a French usufruit.

What is equally clear is that, whilst, on the one hand the Scottish property appears also to be conveyable in its entirety to the Life Renter, subject to a form of reverter to the fiar, there is, on the other hand a dismemberment or carve-out of two separate property rights from both the Scottish and the French propriété so as to create two separate legal rights and dare I say “titles” under s 272 ITA, as supported by the House of Lords’ decisions in the reservation of benefit cases prior to the amendment of s.102 Finance Act. That renders the dismemberment a pure Part I ITA transaction, not a Part III settlement issue, and squares the otherwise oblong circle of coherence with the definition of a Settlement in s.62 Taxation of Capital Gains Act.

Those interested might wish to see Revenue Scotland’s position on the new Land and Buildings Transactions Tax at LBTT10063 and 4:. Further details are given in the Registers of Scotland Manuels.

This not an inaccurate friendly note from a friendly hand, it is merely applying the Courts’ fundamental principle of interpretation and validation of foreign property rights as to their substance as exemplified in Dreyfus. There is no “administration” involved to be subjected to the law of an English forum, as the English court has no jurisdiction over the foreign immovable property right and cannot intervene in its “administration”.

I hope that this is of assistance to any advisor seeking to explain to a French national or for that matter a Brit returning from the EU, as to how their property right has suddenly been perverted without apparent statutory authority into what they might consider a perverse instrument of evasion. HMRC are currently exploiting the fact that lawyers trained in either jurisdiction are not necessarily able to diagnose the subtleties and limitations of s.43 (2) ITA, which have become evident through the subsequent amendments to it and the surrounding areas in its bedding in process.

The main thrust of the 1980 Committee’s analysis, or lack of it, was that the Scottish proper liferent seemed to be the closest thing “north of the Border” to a Life Interest, a definition which had lead at column 826, and to a deal of teasing between the Tory and the Welsh Labour members of the Committee as to whether either had a definition of an interest in possession. Both referred to Pearson, but certainly paid no attention to the decision of their Lordships in that it concerned an interest in possession in settled property alone. Reading Pearson again, it only refers to interests in possession in settled property, not income interests in any property whatsoever, as HMRC are alleging. I find no support in that decision for defining a usufruit as a Life interest as such, so perhaps it is not “close enough” to have its French kilt removed, nor to introduce some fictional woolly quasi equitable underwear into the patrimonial equation in an attempt to cover HMRC’s embarrassment.

There is a copy of columns 842-846 of the Standing Committee A minutes in 1980 concerning clause 84 and the Proper Liferent at at°%202%20%20bill%201980%20scottish%20proper%20liferent.pdf . The full minutes at file:///C:/Users/Main%20User/Downloads/HC_OF_SC_212.Finance%20(No.2)%20Bill.pdf

The issue in the most recent attempt at consolidation of HMRC’s position and practice is heavily reliant upon the approximation of a usufruit to a Life Interest settlement, as opposed to a pure interest in possession: see .

Perhaps best to keeping powder dry on quasi-usufruits on movables, this comment is confined to French immovable property rights.

I offer no comment on any other continental equivalents saving to say that the Italian Portuguese and Spanish equivalents bear a similar analysis.

Peter Harris

For those interested in the s 43 (2) and (4) ITA phenomenon, the devolution to Scotland of its own “sovereign” land registration duty has required the Scots to remove the kilt from the wee beastie known as the proper liferent.

Apart from consulting Gordon’s Scottish Land law or the Stair Memorial Encyclopaeda, the Registers of Scotland Manuals, the registration process for a Proper Liferent over Land in Scotland is set out as of 8th December 2016 at±+Detail.

I would like to qualify if not correct my prior comment above.

What is clear is that the proper liferent can be established either by a conveyance of the land to the liferenter, under the reserve of the Fiar’s rights at the termination of the Liferent, or by the Grantor creating it and retaining the Liferent himself. These are convention, as opposed to legal proper liferents.

The Liferenter is registered on the Scottish register of title, as is the fiar:

"The party who has the use of the subjects is the ‘liferenter’. The Latin phrase salva rerum substantia (without encroaching on the substance) applies to the liferenter’s use of the subjects, indicating that the liferenter is not totally free to exploit the subjects as an owner can. The ‘fiar’ is the party who gains possession of the subjects once the liferent terminates. The word ‘fiar’ derives from the word ‘fee’, which in most other aspects of conveyancing practice means full ownership. Confusingly, in the context of liferents, ‘fee’ has a more limited usage, describing only the position of the fiar.

A fiar, under a liferent and fee title, has a registrable interest in the property but, because of the existence of the liferent, cannot occupy the subjects. The liferenter will be the occupier."

The creation therefore follows similar, but not identical procedures as to its creation as the French usufruit, which also has to be distinctly registered as such on the French conveyance.

Moving from Land, which is the main reference for property laws anywhere.

It would be interesting, in the French trust scenario and deeming context to see if a Scottish proper liferent over a Scottish investment portfolio, can be substituted so as to transform a trust or improper liferent into a vehicle which would more closely resemble a usufruit or quasi-usufruit over an investment portfolio to take the entire matter out of the somewhat ill conceived French fiscal definition of a trust -for tax purposes- with the declaratory inconvenience and proprietary dislocations it causes.

I stress that usufruits and quasi-usufruits over movables are not subject to the same punitive régime, as they are the diable that the French know, and can accommodate a gérant of any indivision beneath the usufruit in lieu of a trustee.

There are a number of conventional proper liferents which are coming to light in France, owing to emigration to warmer climes, and the Scots might wish to start adjusting their vehicles from improper to proper to cater for that.

I stress that the honeymoon period for non-declaration of trusts has finished in France, and that tax inspectors are attempting to make the most out of the punitive penalty régime before it is declared unconstitutional.

Peter Harris

The typo s 43 (2) and (5) ITA shoud be read (4), not (5), apologies. The website version has been corrected.

Peter Harris

As an aside and a point of information, whilst the French Conseil Constitutionnel has just ruled, on an application from the Conseil d’Etat , that part of the Trusts penalty régime for declaratory default is unconstitutional. However, It is the percentage penalties which have been declared unconstitutional, as such, the fixed penalties remain untouched. The Conseil has confirmed that these are cumulative, and will apply to each declaration concerned, both the annual ones and the event ones.

There seems to be a marked lack of stomach in the French Bar for going further and challenging the extraterritorial deeming provision themselves, although this would appear to be contradicted in the 1789 Declaration, which applies both to citizens, but also to mankind in general.

A point which French domestic politicians miss in their electoral posturing. .

Peter Harris

I have just heard from a client, a professional, that there was some intimation given by a Paris office of a significant City firm that a usufruit dismemberment created under a French olographic will or by statute under French law as the surviving spouse’s legal entitlement, when the deceased testator is French domiciled and resident can be treated as a s.43 ITA settlement where the usufruitier and the nus-propriétaires are resident and domiciled in England. I stress that the usufruit option was not chosen in this case.

All this simply on the basis of the HMRC newsletter and their reading of s 43 (2) ITA, with reference to Pearson as defining interests in possession {- in settled property…}. Tautologies in abundance!

The process of s 43 ITA does not entitle HMRC to intervene in a foreign state in the succession of a foreign domiciliary to assert- that an English form of settlement applies.

The case they cite, Pearson, is clearly addressed merely to interests in possession in settled property, ergo English, not to legal rights of enjoyment under a civil law system. That system treats trusts as anathema and rejects any attempt to have these registered over land.

I draw this to the forum’s attention as, with the current trend towards adaptation under the Succession Regulation, it seems that lawyers in jurisdictions subject to Regulation 650/2012 are now assuming that they can rewrite other state’s property and succession rules accordingly. That will have fiscal implications in international estates of which more junior lawyers will be unaware

I can only highlight the folly of following this trend without due fiscal consideration, as it leads to exponential fiscal differences at the death of the usufruitier, if it is treated otherwise than the pure property right in rem which extinguishes at nil value on death, i.e. at negligible value at the instant before death.

If the law is followed and respected in both countries, the issue is mathematically certain and clear.

It is not through some inventive non-lawyer at HMRC seeking to extend Pearson beyond what Viscount Dilhorne actually held that the law changes. May I suggest that more care be taken in relationships between London and French offices in this matter, and that persons advising on settlements in Paris actually have an English qualification, as the French get very lost in the fictional labyrinth created by s.43 ITA in the context of a very English institution.

Peter Harris