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Usufruits and s.43(2) ITA 1984. Has HMRC forgotten what "Law" means?

October 30th 2018

Law includes private international and conflict of laws.

The French usufruit viager over an immovable is a wasting "asset". It is an immovable property right which does not operate under any form of trust principle in the same manner that a Scottish Proper Liferent does not function as an Improper Liferent - the latter requires a trustee.

It is clear that the variety of species of usufruit in Europe is leaving Mr Davidson and his team in Newcastle Technical with understandable difficulties in comprehension, which is leading them to make unfounded and totally incorrect and pseudo-academic generalisations out of Roman law, rather than actually addressing the modern developments in each European state. For example, asserting that the latin nu-propriétaire to be the "owner" of the abusus, or the right of destruction which in some warped manner would entitle the French nu-propriétaire to sell the whole propriété rather than their limited right. Given that French law ensures that each legal property right is only sellable by the holder, and not by someone else, the assertion by HMRC Technical's Mr Davidson that it does not is incongruous, and technically abusive. Inferring from a falsehood that either the usufruitier or the nu-propriétaire has the administration, or the deemed trusteeship of the whole of the property - pleine-propriété- as opposed to that of their limited right on that basis, cannot be qualified as anything else but an abusive practice.

The Treasury Solicitor appears to have persuaded Mr Davidson and Mr Key to allege, wrongly, that the nu-propriétaire of a French immovable can sell the usufruitier's rights as well as the nue-propriété without their consent, thus inferring that there is a form of quasi-trusteeship equivalent of a settlement. I cite one previous correspondence, which is being repeated like a scratched record:

"The owner can divide these rights into two groups: the usufruit which will include the first two rights and the nue-propriété which will include the third. This splitting of property rights between being able to enjoy the benefits of the property, but not being able to dispose of it; and the ability to alienate the property, is not so dissimilar to the separation of the beneficial and legal titles to property recognised in English law.

In disposing of the properties to his daughters whilst retaining a usufruit over them, Mr A . separated, for the remainder of his life, the right to sell the property from the right to use or enjoy the benefits of the property. The question then is how the law of any part of the UK would view a disposition that gave rise to such an outcome.

Although there is no formal trust structure or appointment of trustees, English law would recognise the daughters as being the legal owners of the properties, holding them as trustees for the benefit of Mr A for his life, with remainders to themselves. This gives the element of succession required by s.43(2)(a) and in such a context Mr A, as the provider of the funds, would indeed be the settlor under s.44(1)."


In relation to the first clause, English law in fact does no such thing as alleged. The assertion that it does is a blatant falsehood.

For the readers ease of reference, the second paragraph of s.43(2) ITA 1984 contains two distinct clauses:

"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; or whereby, under the law of any other country, the administration of the property is for the time being governed by provisions equivalent in effect to those which would apply if the property were so held, charged or burdened."

The operation of English law in relation to immovables s to apply principles of situs and then conflict and private international law, it does not presume there to be a trust. The process of English private international law and conflict as applied at law is set out in Philipson-Stow v. IRC, (1961 AC 727 which does not support Newcastle Technical 's position at all.

What is more the fact that the nu-propriétaire can operate and dispose of their legal interest independently of the usufruitier was shown both by articles 621 and 815-5 Code civ, and a 1989 decision of the French Cour de Cassation 1st Civil Division of 19th December, 1989. The French nu-propriétaire can in fact dispose of the nue-propriété of which he alone is the absolute owner without the agreement of the usufruitier but not the pleine-propriété, in which the usufruitier has a separate legal interest. There is an expanding market in France and in Spain for the sale of nue-propriété legal interests by pensioners in France seeking an equity release over their homes without the inconvenience of going to a bank or finance company. In short, there is no room at law, whether English or French for the HMRC solicitor to lead Mr Davidson to assert a fictional settlement over the whole propriété, particularly on the sole basis that he cannot think of any other way of addressing it. There can only be a "settlement" over the entire "property", la propriété, if one party, the alleged trustee has a right to sell the whole. In the case of a French usufructuary dismemberment that is simply outlawed. In fact, English law does "regulate" the rights arising from the disposition by way of a usufructuary dismemberment at law, but not as a form of settlement. I will abstain, if I may, from revealing that right.

Whilst it is understandable that a civil servant, with the experience of Mr Davidson, can accumulate a degree of knowledge of a foreign legal system by experience, it follows that if that received experience is wrongly informed, it is inevitable that his analysis of any given foreign set of property rights will be incorrect when taken against the statutory fiction of paragraph 2 of s.43(2) ITA 1984, which has its inherent limitations. However, it is clear that neither the Treasury Solicitor nor HMRC Newcastle have ever taken foreign counsel's advice on what a usufruit actually is in any given jurisdiction, or if they have done so have deliberately ignored it and are not prepared to alter their position.

Treating s.43(2) ITA 1984 as a form of fiscal fulcrum to move otherwise legal rights into an imaginary settlement world was not what Parliament had in mind in 1975. If it had had that in mind, the Minutes of Standing Committee A would have held such a statement from the eminently ill-informed Dr. Gilbert, as the issue not only would have been fiscal, but also a question of a change of the law including the private international laws of any part of the United Kingdom as applied by the House of Lords. A foreign immovable property law interest governed by the lex rei sitae, the law of where it is, not where it is not, cannot be reduced to an imaginary settlement by holding a fiscal telescope to the other blind eye; particularly when it already is "regulated" by English law as a legal right. S.43 (2) ITA 1984 can be circumscribed as the redressing of an Estate duty point as to the application of the lex rei sitae until the foreign land was sold following the House of Lords decision in Philipson-Stow v. IRC [1961] AC 727 which rehearses the law on the matter in exhaustive detail. There appears to be no Parliamentary documentation asserting that s.43(2) ITA was designed to go any further than removing issue, and bringing express English trusts of foreign land into charge, when they were not before. The only fiction allowed appears to be that relating to the second limb of the fiction, namely that of administration of the whole property, which is irrelevant to a usufructuary dismemberment.

The Standing Committee A minutes of the Finance Bill 1975 do not support the imaginary overlay of an imaginary settlement over foreign land, which the courts will classify, as they did English land (re. Berchold) as immovables as opposed to movables.

May I suggest to my colleagues that great care be taken not to take short cuts in analysis and description, as that has led to Mr Davidson's assumptions being wrongly orientated, with substantial injustice and over taxation being wrought. It is now at the point where rather than listening to informed reason, he is now seeking a test case to prove himself and his over-extension of the scope of s.43(2) ITA 1984 right. I would trust that HMRC would pay the whole costs in any such test case scenario.

It is claimed that the case of Dreyfus TC Vol XIV 560 is not relevant, when it in fact provides a limitation on any use of the Taxpayer's and the Courts' imputed imagination. It is difficult to see how a French national's imagination can be encumbered with English let alone HMRC's warped view of what a "settlement" actually is, when dealing with a French immovable right which they know not to be any form of imaginary settlement but a wasting asset! English law as implemented by the Courts, not HMRC, will give full effect as to the substance of the foreign property rights, in particular when these are not trusts. What is more, Mr. Davidson refuses to accept that HMRC has to provide a legal analysis of why their imaginary "view" is correct by reference to both foreign law and any authority in any one of the United Kingdom jurisdictions.

it is clear for example, that Dutch law enables the Dutch usufructuary to consume the property as a whole without the equivalent of the nu-propriétaire having any claim against their estate. On the other hand, a Belgian or a French usufruit does not bear that right, and the usufructuary's estate can be compelled to account to the nu-propriétaire for the substance consumed. That is the source of the development of the French quasi-usufruit. There are therefore substantial differences between legal jurisdictions which are not reducible to a lowest Roman law common denominator, and certainly not by a slack approach to the issue by reference to a trust.

It is curious that HMRC or the Treasury Solicitor can pretend to any authoritative knowledge of French law of property when any relevant article in the Code civil disables that pretence, and then seek to assert that it is no longer their problem, but the taxpayer's.

Is it not time that the imaginary game of quiddich invented by HMRC Newcastle after the Scottish Proper Liferent fiasco in 1978, over EU property rights which are covered by the protection under the Freedom of movement of capital be brought to an end, even if it is just prior to Brexit? The Treasury Solicitor's broomstick is certainly not up to standard when placed against the very law which they are attempting to apply. The statute does not say the municipal law of any part of the United Kingdom, whatever those may be, it says the law of any part of the United Kingdom, which includes its conflict and Private International law.

Reverting to the principles under the Bill of Rights and the limitations on Parliamentary jurisdiction,and therefore on that of the administration which it is intended to supervise.

A foreign immovable property interest, taking effect at law, which is not held through a settlement and which remains governed by the _lex rei sitae cannot be reduced to an imaginary settlement by holding a fiscal telescope to the other blind eye; particularly when it already is "regulated" by English law as a legal right - here a legal not and equitable chose in action. That is contrary to the private international laws of the jurisdictions comprising the United Kingdom, which are called upon in s.43(2) ITA 1984.

When seen in the light of prior private international law and practice, the first clause of the second paragraph to 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" is no more than the redressing of an Estate duty issue as to the application of the lex rei sitae to a foreign immovable right held in trust until the foreign land was sold. That limitation was identified and upheld by the House of Lords in Phiipson-Stow v. IRC [1961] AC 727 . In short, s.43(2) does not go as far as HMRC are currently attempting to make it go.

That clause was required following the House of Lords decision in Phiipson-Stow so as to extend the IHT basis to include foreign immovables held in trust. It was not intended to go further and to render any disposition of an immovable situated anywhere held otherwise than under a trust, a settlement… There is no Parliamentary documentation extending the notion of a settlement to embrace a foreign immovable property interest where there was no settlement holding it. Indeed, on being pressed by John Pardoe MP for an example in Standing Committee A 1975 on the second clause, Dr. Gilbert was only able to direct his example to the Liechtenstein entities covered by the second clause in the second paragraph of s.43(2) in his reply. He did not state clearly that the alleged aim of Dennis Healey, perhaps suffering from Post-traumatic stress disorder after seeing the amount of English owned Italian property on his way northwards from his bridgehead in Anzio, was to override the private international law to which the section itself refers in the "law of any part of the United Kingdom". The only "fiction" permitted by that fiction appears to be that relating to the second limb of the fiction, namely that of administration of the whole property, which is irrelevant to a usufructuary dismemberment. Had it been more, Dr. Gilbert would have had to say so in 1975, as John Pardoe MP had raised the issue of constitutionality. A money bill cannot change the law of property of a foreign state or for that matter the principles of private international law regulating the legal status of a foreign immovable.

HMRC are currently ignoring the fundamental distinction between an immovable and the doctrine of conversion, and assuming that they have the right to convert any immovable property in the world into a movable without the necessary "settlement"; and what is worse dragging the section screaming outside its intended scope and purpose : the taxation of settlements.

HMRC's current Nelsonian "view" is an abomination of prior and fundamental Parliamentary principle that Parliament does not legislate over foreign immovable property interests. I cite the Attorney General, Sir Donald Somervell in 1936 on the Finance Act 1936/ "It means land or such interests in land as are regarded as immovable property by the law of the country where the land is situate. By a general understanding between nations, no nation in the past has ever attempted to tax land which constitutes part of the territory of another country. Therefore, foreign land has always been outside the Death Duty or Estate Duty net. It is simply a proviso that nothing in the Clause is to operate so as to charge with duty any property which by the law of the country in which it is situate is immovable property. It simply excludes foreign land."

Whilst is is clear now that the French and the British now feel free to tax each others' land after WWII, with credit, it is not clear that either State has had the arrogance to go so far as to treat the other's land as fiscally conveyable under the methodology of the laws of the state taxing the deceased. That technically would be a breach of sovereignty and an act of warfare (even if fiscal). These are not movable rights, even with an overlying trust. It is to that eventuality which the first clause of s.43(2) paragraph 2 is addressed, not to immovables which are directly held , so as to fiscally eliminate the issue as to being held 'Improperly' in a foreign or English trust. "Proper", from the latin and the French means one's own.

In short there is no reason to even mention the usufruit as forming part of the IHT estate on the decease of the usufruitier as it has no value in the instant prior to death. Were there to have been a gift of the nue-propriété by way of dismemberment, rather than a post decease statutory exercise of the Widow's statutory right under the French Civil Code, then the nue-propriété may need to be declared as a post 1986 gift.

There is no point in assuming that EC #Taxud or M. Pierre Moscovici could give a toss about this flagrant breach of the EU freedom of movement of capital. They are more engaged in the rarified ether of digital taxation, and the effect upon the EU budget of increased VAT receipts than they feel responsible for the common EU mortal on their death bed, by whom they were fictionally elected. They are content to allow the Member States to anticipate the flood of taxation upon what has been forecast to be the largest intergenerational transfer of wealth in recorded history. A shame that these States cannot content themselves with taxing on death, rather than fictional transfers which have already taken place.


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Peter Harris