Overseas Chambers of Peter Harris

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

40. Succession and wealth planning: Usufructuary dismemberments in France, Italy, Spain etc.

June 26th 2020

The time of year has come round again when clients either purchase properties in France or review their properties there.

Most purchasers believe that the notary involved in the purchase will be able to give them some form of succession planning in France, which, if limited to France, is correct, and inexpensive i.e. free!

Unfortunately the notary's abillities in British Inheritance Tax planning will be limited to some half informed professional commentaries on whether a usufruit dismemberment is a deemed settlement under the s.43 ITA 1984  statutory fiction or not, giving rise to such confiscatory measures as a 10 year inheritance tax charge and a missmatch of tax treatment on either side of the Channel. As every well trained Engmish lawyer knows -if not why not- you cannot have a settlement without a trust, confirmed by Lord Wilberforce in Roome and Deeme v Edwards, as otherwise here is no means of enforcing succession to the asset, inuder English law  since the days of a use.

The recently developed dark media art of publishing half-researched information in the form of questioning in order to create doubt where the law is straightforward has also taken over the internet and social media. Some things are legal fact and in that context are unquestionable.

Amongst other mechanisms  a dismemberment or carve out of legal rights between generations is possible but the wording needs to be very carefully drafted in French and allocate property rights on purchase. What is more, there may need to be consultation and monetary contributions by both parties.

Whilst a simple devolution under French law might assist, using the  domicile/renvoi  allocation in article 34 of Regulation EU n°650/2012 may be available - again you need advice on what a devolution is under English law, it is also possible to manage this by a testamentary disposition, but again, the Notary will need to have British advice on how to draft the dismemberment without creating what HMRC willl then attempt in deliberate ignorance to treat as a settlement fro IHT purposes.  The recent September 2015 Trusts and Estates Newsletter " IHT treatment of usufructs" and its update are a complete smokescreen, as HMRC on each occasion in which an opinion to the effect that a usufruit is a property right was produced has lead to a noli contendare from HMRC.

The point that is frequently missed is that there is no trust involved in the creation of a dismemberment under French law. For capital gains purposes a usufructuary dismemberment cannot therefore be a settlement, as under English law there can be no settlement without a trust.  It is only the statutory fiction contained in s 43 ITA 1984 which can create any anomaly. Taking the trouble to read the minutes of the Standing Committee A minutes in Hansard of the initial  Finance Act 1978 Schedule V definition and the subsequent amendments required in Finance n° 2 Act 1980 is more than instructive as to the dilletante attitude prevailing at the time towards  the Scottish Proper Liferent, which has since become ingrained, not by any statutory definition, but by HMRC's subsequent attempts to overwrite the statutory definition into something which it is not.

What is worse is that HMRC are quite capable of missquoting Viscount Dilhorne in the case of Pearson so as to "establish" that any transfer of a legal interest for life on death is a trust matter, but forget that their "authority" for this, Pearson, was only concerned with the Pilkington Trusts, and is therefore not authority for treating a non-trust mechanism such as a usufructuary dismemberment as a form of settlement. Teaching a Civil servant to read a law that states that their Manual is wrong can be a time consuming and an expensicve process.

One of those cases involved a nue-propriétaire who was both a French avocat and a Barrister: there was no wool left there for HMRC to pull over that taxpayers eyes. It was not a question of costs or relative loss to the Exchecquer at all, unless other lawyers have tried the argument and failed to present it correctly. The degree of deliberate "ignorance" displayed can be summed up in the phrase 'where the estate included a usufruit". By definition no usufruit 'pur et simple'  can be included in any estate as it extinguishes on death under the relevant article in the Code civil.

The Notary normally will not charge for succession advice, and it appears free: it is only a part of the conveyance to them, as opposed to separate dedicated tax advice. It is of no use whatsoever reying upon French orientated Blogs run by estate agencies attempting to give professional advice for free. If it is worth leaving to your spouse or partner or children,  it is worth paying for it to pass correctly.

Rather than miss opportunities for legitimate succession planning, please contact Peter Harris for advice.

Each case needs handling on its own merits but it woudl be unfair to expect a French Notary or avocat to be able to advise on British matters, even if they say they have English experience, university education or qualifications. Experience is needed to make the two laws function together without inflammatory fiscal sparks. Their merely speaking the language does not guarantee their full knowledges of the concepts and the statutory fiction involved.

I will be very happy to assist those who have already purchased and those who are thinking of purchasing French, Italian and Spanish properties in this manner and in giving advice on how to draft and to go about using this elementary but effective mechanism. I work with the notary to acheive the correct result.

The EU Succession Regulaton 650/2012 has indirectly reinforced the validity of these arrangements, by excluding them fmr the defintion of a transfer by way of succession, and has therefore not put them into question.