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 and in specie. 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 and in specie.

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 in 1975, which of course was not indicated to Parliament: why be transparent, it’s only an Act of Parliament.

At no time in the 1969 legislation were Scottish Proper Liferents treated as “settlements” as such, they could not be, merely as a distinct and exceptional 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 united crown. It has no such jurisdiction over foreign land, which should be treated as it is and how it devolves, not as what it is not. Calais is no longer written on the Crown’s heart. For that matter, neither was land in Hanover for those interested in ¨Parliamentary sovereignty" or rather the lack of it outside the United Kingdom.

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 and undisclosed compression of Scotland into the United Kingdom in FA 1975, which was noticed by the opposition members of Standing Committee A, but to which the Government avoided giving any indication or even a reply that it was “viewed” by HMRC to extend English concepts of settlement of land to the entire planet. H%RC are extremely uncomfortable about dealing with concepts of foreign property law, and make little effort to carry out their common law duty of analysis as laid down in Dreyfus v IRC

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. However, as the section refers to the laws of any part of the United Kingdom, that means and includes the Conflict and Private International Law of each “part” and its jurisdictional limitations on its ability to “regulate”, The LPA 1925 does not apply to land outside the United Kingdom, neither did the Settled Land Act, nor TolATA

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, evacuated by its subsequent 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 legal 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. Jurisdiction creep.

The Common Law and indeed common sense dictates that the law of the land determines the property rights as to that land, not some half-cocked foreign elucubrations as to the doctrine of conversion being the elexir of fictional comparative law.

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.
In effect, even were the PIL, Conflict and jurisdictional rules to have been excluded by the deliberate reference to the laws of England or as the case may be to those of Scotland in the 1969 amendment, the Usufruit was still not entrammelled in the definition of a “settlement” owing to the fact that the Scottish Proper Liferent was addressed separately as an indigenous exception. It did not catch the French usufruit, certainly one over land,

The “laws” referred to in s.43(2) §2 ITA do not include fictions contained in the Tax Acts. For HMRC to assert a right to undo and remake foreign law à sa guise, a right which it does not enjoy within the UK, is abusive.

In arguing the allocation of the “regulating” not “governing” law to the laws of any part of the United Kingdom, HMRC effectively shot itself in both feet, because in so doing it introduced the conflict, jurisdictional and PIL of the law of the part of the Untied Kingdom concerned. In England’s case, that includes the common law as was set out in Phillipson-Stow which effectively states that if you do not have an express trust over foreign land it remains an immovable right in rem outside the settlement régime, no matter what.

HMRC’s compliance officers are still waxing eloquent upon the notion of “United Kingdom law” rather than that of any part of the United Kingdom without realising that they are stepping on common law landmines.

What is more, their reliance upon Memec is entirely missplaced, as Memec was a case on the interpretation of the German Treaty. Reading the CA judgment it is clear that it has no relevance to the case of a usufructuary property dismemberment, the actual common law as to the recognition of foreign entities and rights set out in the Case of Dreyfus Vol XIV (1929) p.560 on the Commissioners duty to give full effect to the foreign legal concept, and not to attempt to abuse comparatives simply to bring an otherwise untaxable item into charge still applies. Forgive the Inn humour, but if the Court of Appeal stated that Rowlatt J. got it right, can it be wrong?

Peter Harris

The main problem that HMRC has with s.43(2) ITA is that it creates a fiction which attempts to go against a fundamental rule of the English and Scottish jurisdictions, namely that they have no jurisdiction to allocate trusts or settlements arbitrarily over foreign land. That is not just mere public policy or public order, it is an issue of incompetence. Neither Parliament nor the Courts have any jurisdiction to deem a settlement over a foreign droit réel over land. The only jurisdiction that they have over foreign item is over personal rights or at the limit rights in rem over movables through the connecting factor of a domicile within the United Kingdom or in certain limited cases habitual residence.

IHT attempts to adopt a universalist approach.
The line as to unacceptable universal “fiction” by reference to the common law was drawn by Lord Cranworth in Wallace v Attorney-General and reiterated by Viscount Simonds in Philipson-Stow at page 747:
Your Lordships will remember that the generality of the language of the Succession Duty Act, which would have made duty payable upon any succession arising out of any disposition whatsoever, required that some limit should be implied, and that in Wallace v. Attorney-General (1865) L.R. 1 Ch. 1, 9. that limitation was supplied by Lord Cranworth in words that have been often quoted “that limitation can only be a limitation confining the operation of the words to persons who become entitled by virtue of the laws of this country.” These words were used by Lord Cranworth in reference to the facts of the case before him, in which a testator had died domiciled in France and the Crown had claimed duty in respect of his personal property situate in England at his death. But they have been applied generally, though not without criticism, to other cases where the condition was not satisfied that the beneficiaries “became entitled by virtue of the laws of this country.” Taking these words at their face value I should have thought it impossible to hold that they covered the case of a succession to foreign land whether or not the disposition purported to create a trust. But undoubtedly in Attorney-General v. Johnson the contrary was decided. In that case it was, in effect, held that land in Assam, which was held upon trust for sale under the will of a domiciled Englishman but remained unsold, was liable to duty upon the death of certain persons who were entitled to shares of the surplus income. This decision was criticised by Lord Greene M.R. in In re White 14 and, though it was apparently approved by the Court of Appeal in Attorney-General v. Belilios ,15 it does not appear that the only reason that was given for the decision commended itself to the court. However, it is not necessary to adjudicate on the correctness of this decision. Succession duty has gone, estate duty exigible by reference to it has gone, and estate duty has been reimposed in words widely different from those which were introduced by Lord Cranworth into the statutory language of the Succession Duty Act. It is true that they are not in all respects easy to construe, but I have been able to give them a sufficiently clear meaning which at least accords with the principles upon which the courts (and the legislature) have purported to deal with foreign land. I see no reason why I should give it up in order that the new law may agree with what is very doubtfully thought to be the old.

Estate Duty and CTT have gone, but “the principles upon which the courts (and the legislature) have purported to deal with foreign land” have not.

That line is clearly drawn, the fiction and the self-deception of s.43(2) ends at foreign land which is not held in an express trust. Attorney-General v. Johnson addressed foreign land held in trust and cannot be taken any further. The fiction in s.43(2) ITA might well now be argued to embrace express foreign law trusts operating a conversion of foreign land into equitable personalty, but even that is arguable as the doctrine of conversion is not universal.

There is no “toss of a coin” to be had when dealing with a foreign rights in rem over foreign immovables.

This is a consistent common law approach, see *in re Piercy and re Moses.

S.43(3) ITA dealing with leases for life or terms of years does not come under the umbrella of the fiction in s. 43(2) ITA, even were a usufructuary dismemberment to bear some resemblance to a term of years,which remains to be shown, there is no mention of any foreign equivalent being deemed a settlement.

That is also relevant as that was precisely the issue raised in re Moses which dealt with a South African Roman-Dutch usufruct over land which was subject to a long leasehold, but was notwithstanding a considered a right in rem :


In Freke v Lord Carbery (5) LORD SELBORNE LC decided that the validity of a testamentary disposition of an English leasehold was governed by the law of England – ie, the lex loci rei sitae – and not by the law of the testator’s domicil. The same principle was applied in In the Goods of Gentili (6) and is applicable here. The testator, domiciled in England, has devised and bequeathed all his real and personal estate, including long leaseholds in the Transvaal, to his wife for her widowhood, with remainders over. The Roman-Dutch law is applicable to these leaseholds. It appears that the usufructuary is entitled to enjoy the rents in specie, and that, if the executors were to attempt to realise them, the usufructuary or the residuary legatees could obtain an interdict. It also appears that the usufructuary of immovables is entitled to enjoy them in specie without giving security that they shall be of the same value at the end of his term, the practice of giving security being confined to res fungibiles quae ipso usu consumuntur. The widow is accordingly entitled to enjoy the leaseholds in specie during her widowhood. "

The Learned Judge accepted without demur the opinion of the ex Attorney General of South Africa which can be read at re Moses, Moses v Valentine [1908-10] All ER Rep 313. A more succinct and clear summary of the fundamental legal distinctions between a settlement and a usufructuary dismemberment is hard to find. There is no mechanism in a foreign law to address the evening out and balancing of the respective rights and obligations of those interested under a trusteeship. The rights as between usufructuary and the owner, not the remainderman, exist in rem and in specie. Saving express exception, the estate of the usufructuary has to make good any consumption or erosion of the capital as an obligation. It is a higher duty than that of a tenant under a lease.

In short, albeit at some length, there is a black common law line which the current “view” of HMRC on usufruits has crossed at least in relation,to foreign land and rights in rem and crossing that line is fatal to any application of the “fiction” which as a pure fiction is a falsehood in the real world - in rem. Applying a fiction to foreign realty is certainly more offensive than applying it to reality.

Peter Harris
Overseas Chambers