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25. French usufruits over French property: one solution for the English nus-propriétaires.

January 10th 2020

Usufruits in France

The French notariat frequently propose an estate planning structure to their clients  known as a usufruit/nue-propriété dismemberment  so as to facilitate the transfer of a French property to the next generation as a gift, at a lower tax basis, rather than on the whole value of the property on the death of the survivor. From the French perspective, it is tax efficient and normal.

This would not be a settlement under English law, as two legal interests are created over Foreign land, which is outside Parliament's legal jurisdiction over land which only extends to land in the United Kingdom: even the Scots have them.

A usufructuary dismemberment is not a trust but HMRC are abusing a statutory fiction under s43(2) Inheritance Tax Act 1984 to assert that the granting of a full legal right of nue-propriété to their Children by the parents and the retention, not reservation of another legal right, the usufruit, by the donors could only be achieved under English law by a trust. That analysis is wrong.

However, given HMRC's current strategy of squeezing blood from legal stones, whether foreign or not, in Inheritance Tax matters, it is frequently cheaper in costs and in argument to parry that eventuality.

If your parents have retained a usufruit and are coming to the end of their lives, it may therefore be in your interest to have them make an adjustment so that the extinction of their usufruits does not enable HMRC Technical to argue that the whole property value is transferred to you on their death.

Certainly, if your parents live in France and are thinking of returning to the UK after Brexit or are being forced to return, this solution can be adapted.

If a widow or a widower has inherited a usufruit from their deceased spouse, with the Children taking the nue-propriété, it may be possible to make the same type of adjustment there.

Whilst HMRC argue that there will be a difference in treatment between such a dismemberment made before May 2006 and those made thereafter under what HMRC choose to reinterpret as the Relevant Property régime, that can be managed according to the facts.

The proposal that I may make is based upon a position admitted, grudgingly, by HMRC in correspondence in which they accepted the adjustment without being able to apply s. 43(2) ITA or s.49 ITA which only applies to interest in settled property.

Contact Peter Harris for assistance and advice.