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.
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 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. HMRC do not respect these
steps at all alleging 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. A decree from the Second Lord of the
Treasury is insufficient for this type of architecture to hold
up.
The Treasury Solicitor appears to have persuaded Mssrs. Davidson
and 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. 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. The
assertion that English law does so 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 its scope 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 Bons 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 Technical 's position at
all. That is part of the law referred to in the clause.
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. 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 statutory 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.
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, 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. The usufruit 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 Scoland 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, whichn 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 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 quidditch 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.
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
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 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",
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, despite Mr.
Davidson'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 when
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 are 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 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 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.
peter.harris@overseaschambers.com