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 http://www.overseaschambers.com/media/42952/standingcommiteee%20a%20minutes%20on%20clause%2084%20finance%20n°%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 https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm27054 .
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