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Usufruct is a civil law term referring to the right of one individual to use and enjoy the property that is vested in another.
Usufruct is a little known aspect of property law that is worth knowing for inheritance tax purposes.
In this article, we'll talk a little bit about how usufruct works. We'll also give some tips about how best to take advantage of it.
We'll add the usual disclaimer. Make sure to check the HMRC documentation, or work with a professional accountant or lawyer, before making any big decisions.
According to Wikipedia, usufruct is:
a limited real right (or in rem right) found in civil-law and mixed jurisdictions that unites the two property interests of usus and fructus:
In essence, it's the right to use another person's property.
If an estate includes a usufruct, this can have implications on how inheritance tax is calculated.
This is by no means a settled issue. The HMRC page even includes the quote:
However, it may be the case that including a usufruct could result in a more favourable inheritance tax settlement. Once again, we urge you to consult with a tax specialist if you think this might affect you.
Usufruct can also have implications if the estate is located in a foreign country.
Once again, HMRC admits that this is something of a grey area. Because a usufruct implies a split in ownership, any transfers could be treated as exempt (or partly exempt) from IHT considerations.
HMRC made changes to the way that IHT is applied in 2006. As such, transfers after this date are treated slightly differently. From the HMRC page:
As you can see, this is a complex area of property law. In some cases, a usufruct may be helpful in terms of reducing your IHT responsibilities.
If you'd like to discuss how you might benefit from usufruct, please get in touch.