Overseas Chambers of Peter Harris

Maison de la Boucterie
Rue de la Boucterie
Saint Saviour
Jersey, JE2 7ZW

French Usufruits, and the Scottish Proper Liferent, two sides of the same civil coin;

April 11th 2017

I am continuing the comparative fiscal analysis of the various British and French models of property which address the issue of retention of an interest in property, and the transfer to a second generation.

This is of paramount importance for those facing the current French and British confrontation of laws and fiscal practice in succesion matters.

The British Finance Act 1975 introduced the definition of a fictional "settlement" into Capital Transfer Tax now Inheritance Taxation, and that definition had to be corrected in the Finance (n°2) Act 1980 by an additional specific charging clause treating a Scottish Proper Liferent as this fictional "settlement", which it clearly had not been, much to HMRC's embarrassment. A reading of the Standing Committee A minutes of 24th June, 1980 at §843 will disabuse those still believing that HMRC does not make mistakes of this nature.

The Proper Liferent is comparable to the French usufructuary dismemberment.  It is to be distinguished from the Improper Liferent, which does involves the transfer of the property to a trustee, and which, unlike the Proper Liferent was caught by the initial definition of a settlement  in 1975.

There is a large amount of concern amongts the British emigrant population in France as to the treatment of British trusts in France given the somewhat hallucinatory redefinition provided in article 792-0 bis I CGI and the equally perverse deeming succession provision which bears no resemblance to any deemed fiscal transfer known in the United Kingdom.  It is taken from the historic Grantor trust mechnism in the United States, which would explain that.

The following might assist.

Were an English trustee to decide to change the property law of their trust to that of Scotland, and to transform the trust into an Improper Liferent, there would be no change in the UK fiscal position. It would be tax neural, to the extent that there was no change in the interest in posssession. That remains to be determined

Were the Scottish Trustee then to retire and, on so doing, convert the Improper Liferent into a Proper Liferent, the trusteeship would by definition disappear, with the previous beneficiaries taking "properly".  Provided that clearace is given, this is unlikely to trigger adverse British tax consequences, as, given the specific inclusion of the Proper Liferent in the definition of a settlement at s.43 (5) ITA 1984, there would be no change in the economics, or the value.

That would mean that the Scottish Proper Liferent would, as a usufructuary dismemberment, no longer be treated as a trust, for French purposes, and a far better tax treatment given to those unfortunate individuals who have settled in France with an English trust.

However, the Proper Liferent as such is not the most convenient method of managing an investment or for that matter an investment portfolio for persons retiring to France. It is also uncharted terrotory as far as ceratinthe equivale,t of a quasi-usufruit in France  whereby any decrease in the capital value  of the portfolio by withdrawal  by he usufruitier, creates an indebtedness to the nu-propriétaire. Substitue Proper Liferenter for usufruitier, and Fiar fro nu-propriétaire, an t he comparison is created, whetheer the two equate is another matter, here for a Scottish lawyer.

With an degree of careful drafting, it is technically possible to constitute a usufruct over personalty in English law, thus winding up a trust along similar lines.  It might be necessary to secure HMRC's confirmation that they will continue to consider it as a settlement, if there were an advantage in so doing, but that might require a degree of double-take in relation to the French usufruit treatment, which they persist in treating as an interest in possession under Pearson, despite the obvious mischief  that Pearson only constitutes authority for a receipt of income from property being an interest in possession, when it is an interest in "settled" property, as opposed to property in general. Taking that route would simply fall into the same trap as certain English advisers did in assuming that if they argues a settlement, they could make the IHT treatment mirror the French succession duty payment whereby the nus-propriétaires could delay paymet of their droits de succession due on the decease of the grantor untl the death of the usufruitier, providing that they paidthe duty then on the valeue ofeth whole prpooert i the initial decease. They thus obtained a corresponding tax credit under the Succesion duty Treaty which wudl oytherwise have been unobtainable. Thers is no room for such blind-eye acrobatics nowadays.

The French administration at least had the intellectual honesty to point out in the first paragraph of their initial Trust instruction that a usufruit dismemberment was not a trust.  That can be applied to a Proper Liferent as it is practically undistinguiishable

Anyone wishing to advance along these lines should contact Peter for assitance, in harness with Scottish Counsel from a similar civilian "stable".