Usufruct of Jersey house

Trusts Discussion
1

I have a client who is UK resident and domiciled. He owns a house in Jersey having inherited residence rights. He would like his children to inherit the house and residence rights.
He would also like to mitigate IHT if possible. I am aware of the following principles:-
-Jersey real estate cannot be held in trust
-if my client leaves the house to his wife outright, this will secure IHT spouse exemption . However, if she then gifts the house to the children, they will not secure Jersey residence rights.

I was wondering whether a short term usufruct in favour of the spouse(say 2 years minimum) would give the desired result.
I understand that this would work in Jersey. Once the usufruct in favour of the spouse determined, the children would inherit the house outright and this should secure Jersey residence rights.

Do contributors consider that the usufruct would be treated as an IPDI, securing spouse exemption? I am aware that there would be a PET on the transfer to the children.

2

Yes the short term usufruct would give the desired result, but you will need that checked by a Jersey advocate or solicitor. The usufruct or usufruit is alive and flourishing in Jersey despite mainland attempts to redefine it.
It will be essential from the legal and the IHT perspective to have the usufruct and the nue-propriété conveyed in front of the Royal Court, so as to be clearly evidenced as an immovable right in rem. I would suggest that the Jersey conveyance actually states that in the conveyance to forestall any move by HMRC Technical to countermand the obvious and attempt to shirk considering the classification rules applicable to what are here foreign immovable rights in rem by missapplying the second paragraph of s. 43(2) ITA 1984. If guidance is needed, please let me know as the correspondence with HMRC that I have had is navigable but only with the right sextant and compass.
There has been some reference in textbooks on Jersey law to a usufruct being in some manner an easement or a servitude. This is not a correct statement of the modern position as the reference made to those concepts is not to the modern ones, but to the old Roman law rights, which have developed over a millennium and half into fully fledged rights in rem, not personal ones, as in France.
No, the Usufruct is not an “interest in possession in settled property” and therefore “relevant property” as there is no settlement. There is no trust, either under Jersey law or under a correct classification procedure under English law and the state of affairs referred to and required in Barclays Wealth does not exist either in Jersey law.
The value of the usufruct by which the donor’s estate would be lessened would benefit from the spouse exemption, but it would obviously be far less that the value that HMRC would seek to apply to it under its favourite and totally unjustifiable fiction. Whilst the French valuation under article 669 CGI by way of comparison by reference to the age of the usufructuary is not directly applicable in Jersey, a Jersey advocate might seek to apply a valuation by reference to a similar principle.

The gift of the usufruct to the spouse and the nue-propriété to the Children would only come into charge if the donor did not survive 7 years, so the issues involved may only at the moment be hypothetical.

However, as there is no “settlement”, fictional or otherwise, there can be no initial, decennal year or exit charge either as there is no interest in possession in settled property and no “relevant property” created.

Were the rights not to be given consideration as separate legal “estates” over the same property, the gifts could be considered to be “carved out” of the chose as legal, not equitable rights. They will not fall to be mishandled as GROBs as, if read correctly in the light of Ingram s.106 FA still does not apply to carving out or disposing of legal rights (or if you insist on the anglicism legal estates) in land in this case.

Please do not hesitate to contact me for further technical input.

Peter Harris
www.overseaschambers.com
Jersey

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3

My only experience of usufruit was over 50 years ago as a junior in the executor and trustee department of one of the banks where the deceased had an interest in one in Brittany Consequently I have forgotten most if not all of what transpired except that I remember it was complicated! My reason for posting this is to express my admiration at the interesting way in which Peter outlines how the matter needs to be approached. Indeed his postings, although usually lengthy, are always a pleasure to read and certainly are educating. It is also reassuring to know that there is someone on the forum to whom one can refer such matters for advice.

Patrick Moroney
BWL solicitors

4

For those still labouring under the impression that a usufruit can by some interpretative sleight of hand be considered a trust, please see the Recognition of Trusts Act 1987 which reads as follows:

“1. Applicable law and recognition of trusts.

  1. The provisions of the Convention set out in the Schedule to this Act shall have the force of law in the United Kingdom.

  2. Those provisions shall, so far as applicable, have effect not only in relation to the trusts described in Articles 2 and 3 of the Convention but also in relation to any other trusts of property arising under the law of any part of the United Kingdom or by virtue of a judicial decision whether in the United Kingdom or elsewhere.”

See also (5)

That seems to take out rather effectively HMRC’s “view” as to any “outcome”, under s.43 (2) ITA certainly in relation to the Jersey Usufruct to which Sarah Godfrey alluded. The outcome is simply not a settlement as there is no trust. They do flourish in Jersey as a property right, as they do in France and elsewhere, but not as a Roman Law easement or servitude to which they may owe some past, but not present “genetic” coding.

Article 2 of Schedule 1 (the Hague Convention) reads:

“Article 2

For the purposes of this Convention, the term “trust” refers to the legal relationship created—inter vivos or on death—by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.

A trust has the following characteristics—

  1. the assets constitute a separate fund and are not a part of the trustee’s own estate;

  2. title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee;

  3. the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law.

The reservation by the settlor of certain rights and powers, and the fact that the trustee may himself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust.”

When categorising a usufructuary dismemberment, which one has to do under s.43(2) ITA before making the error of straddling the splintering fictional broomstick proffered by HMRC’s Manual, there is very little more to be said. It simply is not a trust and cannot be treated as such under “the law of any part of the United Kingdom” to which the section refers. The law of any part of the United Kingdom is defined by the Recognition of Trusts Act 1987 which incorporates the Convention into exactly the area of law referred to in s.43(2) ITA 1984.

As was also clarified in Barclays Wealth, in addition to a foreign trust disposition being required for the first limb of the second paragraph to s.43(2) ITA 1984 to operate given a), b) and c), Jersey is not part of the United Kingdom. If Jersey or Guernsey were to be dragged into that fold by unconstitutional force a similar provision to s.43(4) ITA would need to be inserted to render a Chanel Island usufruct a settlement by treating the instrument or conveyance creating the disposition as a “settlement” for the purposes of the Act.
Peter Harris

www.overseaschambers.com (Jersey)

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