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

April 12th 2021

This article is now a running commentary which has been updated. Certain of the HMRC staff mentioned have retired, I will refer to the offices concerned as HMRC Technical despite their assimilation into a different department.

"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 over a chose 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.

S.43(1) and (2)  ITA 1984 do not attempt to provide a definition of a settlement for application within the law of any part of the United Kingdom.

"(1)The following provisions of this section apply for determining what is to be taken for the purposes of this Act to be a settlement, and what property is, accordingly, referred to as property comprised in a settlement or as settled property."

The definition is limited to Inheritance tax, not the laws of property in any one of England, Wales, Scotland or Northern Ireland.

As the usufruit does not involves property being held in a trust pf any form, it is up to HMRC to prove its case that it might do.

It is clear that the variety of species of usufruit in Europe is leaving HMRC Newcastle Technical with understandable difficulties in comprehension, which has led 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 later French nu-propriétaire to sell the whole propriété rather than their right, dispossessed of the jouissance. 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. S.43(2) ITA 1984 requires a series of statutory steps to be respected, and to cite the principle in Ramsey in reverse, each of these has to be respected by HMRC in order to tax a transaction correctly. The law "of any part of the United Kingdom" refered to in the subsection also requires a certain set of steps in the classification of the rights arising from the usufructuary dismemberment which again HMRC have chosen to ignore.

HMRC do not respect these steps asserting that a "fiction" entitles them to elude the wording of the statute. It is time that a Gentleman from Porlock intervened to halt this opiate driven fiscal fantasy in a fictional extra statutory pleasure dome.

The Treasury Solicitor appears to have persuaded HMRC 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 with a certain Tony Key, 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. It cannot, and what is more no English Court would consider inflicting a trust on French immovable property outside its jurisdiction. It will not even take judication to enforce the Children's legislation over French property where the English child is resident in France, let alone in England, although that position is being modernised. The assertion that English law does so as a matter of principle is a blatant falsehood.

For the reader's 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 point to bear in mind is that this paragraph is limited to property held in trust or by trustees under a) and b) which immediately precede it and limit the scope of s.43 to property actually held in trust. That reading is full square within the Court of Appeal decision of Henderson LJ in the recent case of Barclay's Wealth. All the second paragraph does is to permit express dispositions into trusts regulated by a foreign law - in that case the Trusts (Jersey) Law 1984 - to be considered and treated as English settlements nothing more. Trusts only create personal rights against a trustee, which can also be held enforced against the person who comes into possession of the chose, or property, otherwise than as a Bona Fide Purchaser for value without notice of the trust (a BFPVWN). They do not create rights in rem. Were trusts to do so, then the BFPVWN, Equity's blue-eyed boy, would not be able to keep the trust property which they have purchased.

The operation of English law in relation to immovable rights is and remains 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 or Nottingham Technical 's position at all. That is part of the law referred to in the clause.

The rules as to classification of concepts and the applicable law laid down by the English Courts are clear. HMRC have entirely ignored these elementary requirements. The most recent judgment on these issues is that of the Court of Appeal in the case of Macmillan v. Bishopgate Investment Trust [1995] EWCA Civ 55. It is self-evident that the issue of a usufruit as a right in rem in land cannot be classified as a trust or settlement under the well-established rules set out in that case as it is the law of the land i.e. France that defines the cause, not HMRC nor its "fiction". Under "the law of any part of the United Kingdom" which includes the given nation's conflict of law principles, the usufruit over land has to be qualified as a right in rem over land, not as a settlement or as a trust.  The very law to which HMRC are referred by the section defining a settlement for IHT purposes requires that classification.

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 he cannot dispose of 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. It is a profit à prendre.

Whilst it is understandable that a civil servant can accumulate a degree of knowledge of a foreign legal system by experience, it follows that if that received experience is wrongly informed and worse wrongly applied it is inevitable that their 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 statutory limitations. However, it is clear that neither the Treasury Solicitor nor HMRC Technical 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.

The degree of intellectual dishonesty deployed by HMRC goes to treating the French legal term "jouissance" as merely meaning enjoyment. It means no such passive thing. It requires the person in possession to exercise both the legal prerogatives and also to undergo the legal responsibilities implicit in their possession. Neither should it be interpreted as requiring the taxpayer to lie back and imagine the fulsome application of mere municipal English law as that of any part of the United Kingdom. It is a real right over the thing or chose itself comprising actual obligations, not a personal right.

What is worse, HMRC are quite happy to mistranslate the term "chose" used in the definition of a usufruit as property. It bears the same meaning as the English term chose in action:

"L'usufruit est le droit de jouir des choses dont un autre a la propriété, comme le propriétaire lui-même, mais à la charge d'en conserver la substance."

"The usufruct is the right to enjoy things of which another is the owner, as the owner themselves, but under the charge to conserve the substance."

Taken at its face value, the then Mr Davidson's inelegant attempts at its translation leave the French literate lawyer in a state of shock as to his incompetence:

"Usufruct is a civil law term referring to right of one individual to use and enjoy the property that is vested in another, provided the property concerned is neither impaired nor altered." ITHM27054.

The usufruitier enjoys the property as the owner, having its jouissance, not as if they were the owner. The usufruit and the jouissance is vested in the usufruitier as a legal title or estate.

The chose is simply not identical to the propriété. The chose can bear two dismembered property rights in rem. La propriété here is composed of la nue-propriété and a separate immovable property right such as the usufruit, Neither HMRC nor Parliament can legislate over immovable property rights of a separate State (They can only do so in Scotland by virtue of the fiscal Union). That is not the law of either the United Kingdom nor any part of it. Hence the reason that no English court can adjudicate over foreign property rights over foreign immovables, let alone in Scotland or Northern Ireland, which from the English perspective are foreign jurisdictions.

Treating s.43(2) ITA 1984 as a form of fiscal fulcrum to move otherwise legal rights into the world of an imaginary settlement 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 so as to exclude the private international laws of any part of the United Kingdom as previously applied by the House of Lords. A foreign immovable property law interest governed by the lex loci 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 issue as to the application of the lex loci rei sitae at least 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. Even so, that is not conclusive to defining the dismemberment as a settlement either. There appears to be no Parliamentary documentation asserting that s.43(2) ITA was designed to go any further than removing that issue, so as to bring express English trusts of foreign land into charge, when they were not before. The only fiction allowed, under the Parliamentary discussions 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. Bechtold) 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 HMRC'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, HMRC sought a test case to prove themselves and their 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 by HMRC that the seminal case of Dreyfus v IRC TC Vol XIV 560 is not relevant, when it in fact provides a limitation on any abuse 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, HMRC refuse to accept that they have to provide a legal analysis of why their imaginary "view" and their classification 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 quidditch invented by HMRC Technical after the Scottish Proper Liferent fiasco in 1978, over EU property rights which were covered by the protection under the Freedom of movement of capital be brought to an end, even those 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.

The force of legal gravity brings the issue back to earth.

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 loci 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 loci 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 Philipson-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 Philipson-Stow so as to extend the IHT basis to include foreign immovables held in trust, thus overriding Philipson-Stow. 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 section when read in plain English appears to be that relating to the second limb, namely that of administration of the whole property through such legal entities as Liechtenstein foundations and anstalts, which are irrelevant to a usufructuary dismemberment. Had it been more extensive that extending the English settlement to cover dispositions into foreign trusts, 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. It can however regulate foreign express trusts as if they were English as Henderson LJ did in Barclay's Wealth.

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 express "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 it is clear now that the French and the British now feel free to tax each other's land after WWII, albeit with credit, it is not clear on what basis either State can have 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 classifiable as movable rights, even with an overlying trust (re. Berchtold). 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", derived from the Latin, and used in French and apparently now only Scottish parlance, means one's own.

Neither the Courts nor the taxpayer are required to stretch their imagination beyond the private international laws of England and Wales which are referred to in s.43(2) ITA 1984. That, despite HMRC's threatening fire and brimstone from the ninth circle of statutory misinterpretation, when set against the application of English private international law by both the Courts and HMRC which is referred to in the very taxing statute that they are supposed to apply.

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 some may consider that the nue-propriété may need to be declared as a post 1986 gift, although technically it should not be. There is no Gift with Reservation of Benefit, only a cession or a carve-out of a legal right, not a gift of the whole, with a reservation of benefit.

There is no point in assuming that EC #Taxud3 could have given a toss about this flagrant breach of the EU freedom of movement of capital. They were more engaged in the rarefied 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 were 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 what takes place on death, rather than inventing fictional transfers which have already taken place.


If in doubt speak to Peter Harris on + 44 1534 625879.