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French Usufruits and dismemberments

August 30th 2018

This article merely addresses the French civil law, and makes no attempt to address usufruits in other jurisdictions or their equivalents.  Those using it may do so only on condition of nominative attribution and citation. It is not legal advice but rather commentary, and specific advice should be sought from Peter on each case prior to using it.

There are several ways in which a dismemberment of the propriété into a usufruit and the nue-propriété can arise, and it is important to understand the manner in which the French civil law functions.

Analysis from a purely English viewpoint is dangerous, and obscures the analysis of the issues rather than resolving them.  Attempts to compare differences have to be associated with a strict discipline of contrast for any analysis to be correct, rather than remaining mere speculation at a comparative law level of little practical value other than academic.

Prior to the Civil code in 1804, and depending on the custom in a given area in France, the usufruit was either a separate property right or equivalent to a burden or charge on the property. That customary variation between the various French regions was resolved as a matter of principle by article 578 Code civ. which effectively declared the usufruit to be a separate property right in itself.

The consequences of that fundamental legal principle follow through the remainder of the Code civil in relation to property and property rights and interests. It also follows through to the statutory rights to the surviving spouse on the decease of their partner, even in some cases where the deceased had children from another union, where it is normally only a portion in nue-propriété. Whilst the right is statutory, it can be extended beyond the statutory rights by will or other disposition.  There is a substantial difference in principle here which can have fiscal and dispositive effects in a foreign estate, as opposed to a succession.

The prerequisite of understanding how that functions is acceptance as a given of  the absolute unitary theory of property under which the Code civil evolved following on the social contract basis of the Republican constitution.  Any analysis that ignores that is flawed, and therefore likely to be incorrect. It is absolutely the converse of the relativistic theories of property by reference to trusteeship or equitable rights, as expounded in the consolidation of the English property legislation over a century later in 1925. The French Revolution was partly a revolt in favour of change in the property legislation which eventually led to the 1804 Code civil.

The démembrement (dismemberment)  is the allocation of certain defined rights of enjoyment of property owned by another to a person for a term defined by law, whether in years to by reference to a life: a retention by an owner on the gift or sale of the property they own to another is therefore a démembrement. There are other rights that can be treated in this manner such as a droit d'usage or a droit d'usage et d'habitation.

The owner, the propriétaire or, here on a démembrement, described as nu-propriétaire has an absolute right to the property and all its prerogatives of ownership in the absence of any competing legal right or claim.  The démembrement splits certain of these rights of property and transfers some of them as property rights to another party, the usufruitier. In short, it is at that point that several separate and independent property rights are created out of one. At no stage is there any form of trust established, as trusts simply cannot exist within the present unitary concept of ownership in France.  Those absolute rights and prerogatives are defined at article 544 Code civil: "La propriété est le droit de jouir et disposer des choses de la manière la plus absolue, pourvu qu'on n'en fasse pas un usage prohibé par les lois ou par les règlements."

In the event that there is no competing claim, the owner, propriétaire or nu-propriétaire ,  has the absolute right to the property, its use and its fruits under article 544  Code civ. There is therefore no transfer of these in any shape or form on the extinction of the usufruit. The owner, whether described as the nu-propriétaire prior to the extinction of the usufruit or the propriétaire after it, has that entitlement prior to and from the very beginning of the dismemberment.

To talk of succession or trust as to the rights of use and fruits between the usufruitier and the propriétaire is therefore an absurdity, even more so if basing an assessment under s 43 ITA 1984 upon such a fallacy.

As a practical example, A usufruitier constructed a building at their own cost on the land over which he had been granted the usufruit.  The owner, la nue-propriétaire asserted that he had rights to the buildings prior to the end of the usufruit  when the usufruitier demolished them.  It was held that whilst the propriétaire could assert a form of right by accession to these were the usufruit to have ended, they could not assert any proprietary right to the buildings during the term of the usufruit itself preventing their demolition when there was no express term in the démembrement enabling them to do so.

The important point to bear in mind is that the usufruit is valid for and restricted to a legally defined term. Where it is defined by reference to a life it is called a usufruit viager.

If it is retained on a gift of the nue-propriété, that gift of the nue-propriété imports as of right, not by way of gratuity, the rights of full ownership of the fruits and user are those of the nu-propriétaire as owner as at the end of the term.  The error is assuming that there is a transfer of or succession to those rights at that point.

There is no succession or contingency to the use and the fruits at the end of the term.

These have already been retained or passed by gift as a matter of law to the nu-propriétaire on the réservation, better retention,  by the donor of the usufruit for a term limited by the legislation. There is no settlement or trust over the rights  Idem for the spouse's statutory right to a usufruit over the deceased spouse's property, if the survivor elects it.

There is also no administration of the property during the term of the usufruit, otherwise than by the usufruitier. The usufruit is a self-sufficient property right, it is not an "improper" right dependent upon a third party or the owner for its administration and exercise.  It is therefore not a trust or a settlement of land or of any other property.

Were that to be the case, English children in their minority would be acting as trustees for their parents where a  deed of purchase or gift made them nus-propriétaires; that would be a nullity under the English 1925 Property legislation: s.20 Law of Property Act 1925.  That neatly demonstrates the absurdity of imagining there to be a trust or settlement where there is none. They are already subject to the management of their assets by their parents under the supervision of a juge de tutelles in France.  To reverse that simply for fiscal convenience and render them trustees for their parent in fundamental contradiction to the laws governing the property is absurd.

Here the parallel with the equivalent, the Scottish Proper Liferent is useful. "Proper" in this context means one's own, not that administered by someone else on one's behalf.  The French term "propre" is similar. There is no administration implicit by a third party or by the fiar under Scottish law either. However, there are significant differences between the allocations of the property rights as between the fiar and the liferenter under a Scottish proper liferent which renders it a different structure to that of any dismemberment under the 1804 consolidated French civil code.

The concept of "administration" only occurs in a Scottish Improper liferent, in other words not proper where the property is in the hands of a trustee, and administered by that third party. The term administration is of the essence, as that is the term deployed in s 43 (2) Inheritance Tax Act, 1984 to distinguish property held on trusts and settlements from property addressed under the standard principle of taxation in the first part of the Act.

The manner in which a usufruit comes into being and is extinguished can only be understood by reference to that unitary definition of property. Article 578 Code civil defines a usufruit as a property right.  Article 617 Code civil states on what events a usufruit is extinguished and, therefore  terminates at nil value.

It is worth noting that certain English commentators have aligned a French usufruit with an English term of years, a lease for life.  Whilst such a term granted in England may be treated as a settlement for English purposes, but only under s.43 ITA 1984; a usufruit is not a bail or a location under French law, both of which are dealt with under a different section of the Code, and are therefore distinct from that concept. These are necessarily contractual,  and do not give rise to real rights. Whilst the usufruit right can be acquired for consideration in a sale, there is no rent as such that can be charged by the nue-propriétaire.

Whilst comparisons with the usufruit and the notion of a life interest are useful, they are of no real value without the implicit contrast, and the differentiation. That is the legal and analytical incoherence with which current European attempts at harmonisation by mere comparison is confronted.

The European freedom of movement of capital between Member States to the benefit of their residents does not tolerate arbitrary requalification of property rights into different foreign substance and form. Within their fiscal and capital Union, the Americans have to give full faith and credit to legal forms outside that of their state to enable their capital markets to function and prevent monetary erosion. There appears to be ignorance of that fundamental requirement at Brussels and in Member State's Treasuries at present.

In other words, under the British tax administration's and certain comparative law academic's analysis of it as a form of interest in possession, the usufruit no longer exists as a property right or interest at law, is successive as to the underlying property and is of purely relative value, in total contradiction with the French code which governs it .  That analysis is wrong.

The law governing it does however admit that where this is stipulated expressly in the disposition creating it, a usufruit can be joint or even successive, in other words it can be transferred as a usufruit on death, as a  right, and it then takes its value from the term remaining, whether that is expressed in years or by reference to the life of the holder.

Otherwise, there is no succession or transfer of the usufruit on death.

The usufruit is not a term of years in the English sense, as it does not fall within the area of the Code civil dealing with those arrangements, which are categorised as leases.

It is possible that a bad solution of convenience through misstranslation was found in the Cour de Cassation Case D II 393 of 16th June 1933, which could explain why HMRC and several other lawyers in London who should know better infer innocently that "property" in s. 43 (2) ITA 1984 necessarily refers to the  whole property concerned, rather than the overriding s. 262 ITA definition of "property" which includes property rights and interests as distinct legal rights. The consistent caselaw of the House of Lords and now the Supreme Court that "property" in the Inheritance Tax Act by virtue of s 272 includes property rights at law appears to have eluded their reading list at University or conversion courses. The latter is the right approach, as it is the Code civil 1805 that determined the usufruit's status as a property right at law, and not HMRC pushing a missreading of s 43 ITA 1984 by ignoring s. 262.

In that case the French Cour de cassation in plenary session stated that the forfeitary evaluation of a usufruit at its creation or during its term could only be done by reference to its extinction at the end of the term.  There is no succession involved. In that case, where a fixed term usufruit valued under the formula for fixed term usufruits gave a higher value than the corresponding  formulation of an unfixed term, terminating on an assumed date of decease, the latter should prevail. The Cour de Cassation expressly stated that the usufruit extinguishes in any event on death, even prior to the end of any fixed term defined in it. The confusion in English minds was apparently that the forfeitary valuation of the legal right took place by reference to the whole property, divided between the usufruit and the nue-propriété by reference to the age of the usufruitier. The English fallacious and frankly evil assumption, or rather presumption  that the valuation method defined by reference to fractions of a whole by the French Cour de Cassation in some manner denied the usufruit's Code definition  as a separate property right at law then is used to enable the fallacious  "tour de passe-passe" into a form of fiscal "equitable" interest.

The coup de grâce to the proposition  that a usufruit can be assimilated to settlement lies in the fact that a usufruit cannot be overreached by the sale of the nue-propriété by a nu-propriétaire. The nu-propriétaire can only sell the nu-propriété which he owns.  He cannot sell or dispose of the whole property for a price at the value of the pleine-propriété and, even less leave the usufruitier to assert their rights over the proceeds of sale.  A dismemberment, whether involving a usufruit, droit d'usage ou droit d'habitation is therefore entirely separate from the English law of property and its overreaching mechanisms which constitute the backbone of settlements and the law of trusts as set down in ss.1 and 2 of the Law of Property Act 1925.

HMRC appear to have found a professor of Roman law who is able to state that French ownership of property is not an absolute, but rather a range of separable prerogatives.  HMRC then proceed to infer that these are "beneficial entitlements" so as to attempt to avoid treating the French dispositon of the nue-propriété, and the retention of the the legal right of a usufruit into a settlemnt by reference to the Engish Equities involved. That is not a correct interpretation of the term "disposition or dispsitions" with can only be defined by reference to the French disposition. To attempt to futher redismember, or rather deconstruct  what is a dismemberment at law is fallacious, particularly as the usufruit is defined as a separate droit réel (property right, not a personal right) by the Code civil at "law", not as a form of heady collation of equitable rights à l'anglaise.  Had it been so, then the term in legals  French would have been "jouissance", which is simply not not the same thing.

What is more, HMRC appear to have been advised wrongly, that the nu-propriétaires' prerogative of "abusus", includes the right of sale, disposal or destruction of the whole property, including the usufruit. That is an entire falshood.  It is a matter of great concern that such an error is being touted as a correct description of the foreign law.  Each of the parties has the right to sell or dispose of their own right independently: the usufruitier can sell or dispose of the usufruit, and the nu-propriétaire the nue-propriété, wihout needing the approval of the other. Al they are selling is their own distinct part of the whole. That is why,  when a purchaser seeks to acquire the whole property, both the usufruitier and the nu-propriétaire have to be party to the deed of sale. Thers is no overreaching machinery available in France to overcome the existence of two entirely separate legal rights in the same property without each part being party to the deed of sale.

To think otherwise is to fail the first step in logic. The fact that something -the dismemberment- may be compared to something such as an English conveyance by a trustee implies that a contrast exists, and that contrast has to be made and retained particularly in relation to the statutory fiction that is s.43 ITA 1984, and which is contrary to the House of Lords temporarilly "infallible" statement of elementary English law that a settlement cannot exist without a trust. The game of Quiddich into which HMRC seek to draw the uniniated has to end there.  The taxpayer cannot be required to use their imagination in the application of a self assessment  taxing statute. That is contrary to the elementary and fundamental constitutional definition of a tax: that the liability and the basis of assessment have to be clearly, not ambiguously defined. S.43(2) ITA 1984 is defined and definable, but not to the point to which HMRC seek to stretch it.  Otherwise compliance assessments will be adjudicated as to who has the better Broomstick, as opposed to who sticks to what the taxing statute ctually says.

The reader should note that there is a significan amount of notarial activity in France in the creation of specific express property rights by way of dismemberments, and that this is not limited to quasi-usufruits over investment portfolios, but more importantly to the creation of specific interests in land and immeubles.

However, the crux of the matter is that s.43(2) ITA 1894, paragraph 2 does not do what HMRC have portrayed and continue to portray it as doing, which is to give them the right to treat anything foreign as a settlement or a trust.  The amendment to the charging mechanism in 1975 was not directed at enabling them to do that, but to another issue of private international law. Of that more anon, or speak to Peter for assistance.