Usufruct usually treated as interest in possession trust, HMRC confirms

HMRC has confirmed that it will usually treat a usufruct (the right to use and enjoy another's property) as an interest in possession trust for inheritance tax (IHT) purposes. However, it recognises that the nature of a usufruct differs between jurisdictions and the circumstances of each arrangement need to be considered separately.

HMRC has published this confirmation in response to exchanges on internet forums. These presumably include the Society of Trust and Estate Practitioners (STEP) Trusts Discussion Forum. For links to recent discussions, and an example of when the treatment of a usufruct may be relevant, see Ask, Does the IHT spouse exemption apply to a surviving spouse with a French usufruit?.

HMRC does not give any authority or reasoning for its view. As far as we know it has not previously published this view, although a number of commentators have reported that it takes this approach in practice.

Usufructs are common in civil law jurisdictions such as France (usufruit) and Germany (Nießbrauch), but can take different forms. Practitioners should note that the approach taken by HMRC in one IHT case does not necessarily indicate the approach it will take in another. The caveat about considering the circumstances of each arrangement is consistent with the approach taken to the classification of foreign entities for UK tax purposes in Memec plc v Inland Revenue [1998] EWCA Civ 941. For a further example, see Ask, How is a Liechtenstein foundation treated for UK tax purposes?.

For information about succession law in other jurisdictions, see:

Source: HMRC: NewsLetter For Trusts & Estates Practitioners (April 2013).