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A usufruct is a common way of holding property in many countries in Europe (including France, Spain, Italy).
A usufruct is the right to the use and enjoyment of another’s property for a limited time. It usually lasts for a person’s lifetime.
HMRC has recently reconfirmed its view last set-out in an HMRC Trusts & Estates Newsletter from April 2013 that a usufruct will, in most cases fall to be treated as a settlement for Inheritance Tax purposes. This effectively treats a usufruct as giving rise to an interest in possession trust for Inheritance Tax purposes.
An interest in possession trust is where the beneficiary is entitled to trust income as it is produced. On assets transferred into this type of trust before 22 March 2006, there’s no Inheritance Tax to pay.
On assets transferred on or after 22 March 2006, the 10-yearly Inheritance Tax charge may be due. It is worth noting that the Inheritance Tax regime sometimes uses its own classification for trusts. Interest in possession trusts may fall within what are known as ‘relevant property’ trusts.
Since 2013, HMRC has dealt with a small number of complex cases where the estate included a usufruct. There was a difference between the value reported by the taxpayer and the value that emerged following HMRC’s approach.
In these cases, the amount was not sufficient to warrant pursuit and HMRC in accordance with its Litigation and Settlement Strategy adopted the value reported by the taxpayer. However, HMRC is keen to make it clear that the treatment of a usufruct remains as stated in the April 2013 Newsletter and that any tax due will be calculated on that basis.
These changes are the natural consequence of the changes made to the Inheritance Tax treatment of settled property in 2006. HMRC accepts that the consequences of creating a usufruct over property are much less favourable than they were prior to March 2006.
However, HMRC remains of the view that, generally, a usufruct should be treated as giving rise to a settlement for Inheritance Tax purposes. It is important that UK resident individuals properly understand the implications of a usufruct because of the IHT implications.
We would be happy to discuss this with any of our readers interested in learning more about this issue.