Overseas Chambers of Peter Harris

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An article published in Lexology by Adrian Shipwright and Peter Harris on Usufructs and their mistreatment by HMRC for Inheritance Tax purposes

July 9th 2021

This article, by Adrian Shipwright and Peter Harris is concerned generally with how Usufructs should be characterised for IHT purposes and how this should be approached. By way of illustration, some reference will be made to French "usufruits".

'Outcome Bias' is a concept in Behavio{u}ral Decision Research which seems apposite here to describe HMRC's approach to the matters under discussion. it is effectively  newspik for the ex hoc ergo propter hoc fallacy.

HMRC say in the IHT Manual at IHTM27054

"In HMRC's view, a usufruct should be treated as a settlement for IHT purposes given the closing words of IHTA84/S43(2), '….or would be so held charged or burdened if the disposition were regulated by the law of any part of the UK….'. This creates a fiction solely for the purposes of charging Inheritance Tax (IHT) and requires us to look at the outcome of the disposition and then consider how that outcome could be achieved under the law of any part of the UK. Bearing in mind the nature of the split in ownership that a usufruct achieves, the closest equivalent under UK law is a life interest settlement, with the bare owners holding the property for the benefit of the usufructuary (life tenant) with remainders to themselves".

The authors consider this to be the wrong approach. There is no fiction created as such by s.43(2), at most a requirement of comparison. Having ascertained what the position under the foreign law is, there are then two limbs to be considered.  These are that:

  • the property would be so held or charged or burdened if the dispositions were regulated by the law of any part of the United Kingdom; or
  • 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 as to holding or burden.

In this article the authors will

  • Set out the relevant statutory provision;
  • Consider what are Usufructs and the modern French servitude of a Usufruit;
  • Make comments on statutory interpretation
  • Considering the proper approach to characterisation and some relevant case law such as Barclays Wealth

The full text can be found here. It is on Addington Chambers headed paper, as Adrian is the Joint Head of Addington Chambers and Peter an associate member