The IHT treatment of the continental Usufruit: Hans Christian Anderson takes on HMRC's Mickey Mouse IHT manual.

I propose a little dark humour at the expense of HMRC Technical and the Treasury lawyers advising them on the treatment of the civil law usufruct over land beyond Calais or, as they and Mary Tudor could have lawfully inferred, immeubles.

Those interested in legal "fictions" might care to reread Lord Herscel's comments and judgment in The British South Africa Company V The Companhia De Mo?ambique And Others [1893] A.C. 602 which was followed unanimously by Lords Halsbury, Macnaghten and Morris (of Dicey & Morris fame).

LORD HERSCHELL L.C. referred to the note to Parker v. Crook (3): "The words 'In Indibus Orientalibus' do not necessarily import the place to be out of England. There is a place called Holland in Lincolnshire, and there may be a Fort St. George in the parish of St. Martin's."?A note in Modern Reports, Volume 10 “Declaration” page 16 note 13?reads?“And yet when the plaintiff declared upon a deed dated at Fort. George in Indibus Orientalibus, it was held well; because the words in Indibus Orientalibus did not (it was said) necessarily import the place to be out of England, Parker v. Crook.”

The use of the so-called fiction which HMRC have alleged to be created by s 43(2) ITA 1984 had been well and truly sconced by Lord Herschel LC as the rules of procedure under the Judicature Acts with regard to “local” venue (Order XXXVI. r. 1) did not confer any such new jurisdiction as Technical are now alleging in their musings in the IHT manuals. The notion of a transitory jurisdiction between mere counties was not transcribable to a transitory jurisdiction between countries. Put simply the Courts will simply not entertain HMRC’s current position as French land or immovable right in rem is not situated in any part of the United Kingdom, and cannot be brought into the English court’s legal jurisdiction on the basis of a deceased or living individual’s domicile alone. It needs agreement to and acceptance of the English Courts' jurisdiction outside their jurisdiction by all parties. Even that is not the end of the matter as the Serbian Orthodox Church found out before HHJ Matthews in the convoluted case of Vucicevic which if nothing else demonstrates that any scintilla of time adjudicated by an English Court over foreign land will not survive the migratory flight abroad.

So, the phrase in indibus orientialis can be taken as meaning a place wherever anyone wants it to be. There may very well have been a place called Fort George somewhere in the East Indies, but that is now out of HMRC’s and the Treasury’s imperial or colonialist reach. France and the land over which it exercises its law and legal sovereignty can only be “imported” as being outside England and Wales and not in any place within the United Kingdom: in indibus gallicis perhaps?

The outcome; other than Outcome Bias?

There is no point or satisfactory outcome in pursuing the confusion of the equitable remedy of a constructive trust or a trespass to foreign land on the basis of a mere personal jurisdiction over a taxpayer with the creation of a right in a settlement of land or of property, or for that matter allowing HMRC any such liberty. That is not the "law of the land" in both senses of the term, be that sense a colloquial or technical classification. The law of that part of the United Kingdom which is that of England and of Wales is not to be applied in the English courts to France or to French immovable rights in rem on a fictional or on a transitory basis as it neither regulates them nor for that matter governs them -even for the fictional scintilla of time or, here, that instant of suspended disbelief proposed by HMRC. That "scintilla" does not a "settlement" make. There is no enforceable equity abroad.

The argument that an individual’s “domicile” overrides all applicable law and jurisdiction in the matter of Inheritance Tax and the definition of property to which s.43(2) ITA 1984 refers is a legal falsehood. The Law Draftsman was careful to distinguish the terms “regulated by” and “governed by” by the term “or”, when he attempted to calibrate the induction of foreign trusts (and only trusts) by reference to their "regulation" and distinctly such then heady concoctions such as Liechtenstein anstalts and foundations (legal entities) otherwise governed by a foreign law into the term "settlement" or "settled property". See Henderson LJ giving the Court of Appeal's judgment in Barclay's Wealth for the precise consequences of the term "regulated" when it was correctly applied to a trust otherwise governed by a foreign law (that of Jersey) but rendered capable of regulation without further international violence, terrorism or modification by the first phrase or limb of the last paragraph of s 43(2) ITA 1984.

The true entertainment started when the Scottish Law Society waded in to rescue the ugly duckling of the Proper Liferent - an interest in land rather than an improper or trust liferent - from the inequitable maws of the Revenue and the (anglo-) UK Treasury in an article which prompted the Revenue to admit that it had been mistaken and the ensuing amendment by the insertion and addition of what is now s.43(3) ITA 1984. Its terms are revealing as we will see below.

What did the upstanding members of Standing Committee A have to say in their meeting of 24th June, 1980 at §842 to discuss what is now s.43(3) ITA 1984?

Clause 84 Proper Liferent and Fee

Mr Denzil Davies: ...The amendment seeks to find out about the date in the clause. As I understand it the clause is concerned with the different applications of Scottish law, and I quite understand its purpose. But what is not clear is why the clause applied from 11 April. The Budget was on 26 March. Why should the clause apply from 17 April, and what is the significance of choosing that date?

Mr. Peter Rees: The reason is that one view was taken of the nature of a proper liferent for capital transfer tax purposes [§843] until an article was written in the learned Journal of the Law Society of Scotland which gave a different view of it. On reflection, the Inland Revenue felt that the learned journal was right and that its previous view was wrong. To put the interpretation clause matter beyond doubt we introduced clause 84.

No word of this was breathed by my right hon. and learned Friend in his Budget speech, so it was thought only fair that this quite fundamental change north of the Border should be operative only from the date of publication of the Bill. That would mean that no one would be prejudiced until then because it was felt that if we were to make such a fundamental change from the beginning of the financial year people should be put on proper notice of it. they were not given that notice, which is why we made it run from 16 April.

Mr. Stan Thorne: On a point of order, Mr. Goodhew. Can you confirm that you put the question on clause 83 standing part?

The Chairman: I assure the hon. Gentleman that I did and that it was carried.

Mr. Denzil Davies: I am grateful to the Minister of State. I understand why the date is different. I beg to ask leave to withdraw the amendment.

However, the issue of transforming the definition of settled property and settlement into one by as being a deed could not be so easily swept under the rug, as Sir Graham Page intervened as follows:

I was hoping that my hon. and learned Friend might enlighten the Committee as to what is a land proper liferent. I may be a proper Charlie, but I do not know which liferent is proper and which improper. Should there not be a definition of a liferent in the the interpretation clause of the Bill?

Mr. Peter Rees: I understand that a proper liferent is the nearest thing that they have north of the Border - I do not say that in any spirit of deprecation - to a life interest. A friendly hand has put a note before me which states that a liferent is a Scottish term for a life interest. The difference between a proper liferent and a trust liferent is that in the case of the former the property in question is conveyed directly to the person who is to have the life interest, whereas in the case of the latter the property is conveyed to trustees to hold in trust for the life rentor. I hope that my right hon. Friend and the Committee will be seized of the essential legal distinctions.

Question put and agreed to:

Clause 84 as amended, ordered to stand as part of the Bill.

There were several friendly hands floating around the various parts of what eventually became s.43 ITA 1984. If the case of Pilkington is read correctly, rather than confining one's attention to the ubiquitous headnote, their Lordships referred to an interest in possession in settled property, not to the singularly imprecise phrase "life interest". The point is that the Proper Liferent takes effect in law not in equity and therefore cannot be settled property. That unfriendly hand aside, what did the clause resulting from the Law Draftsman's further sassenach exertions actually state? It is now s. 43(4) ITA 1984:

(4) In relation to Scotland “settlement” also includes—

(a) ...,

(b) any deed by virtue of which an annuity is charged on, or on the rents of, any property (the property being treated as the property comprised in the settlement), and

(c) any deed creating or reserving a proper liferent of any property whether heritable or moveable (the property from time to time subject to the proper liferent being treated as the property comprised in the settlement);

and for the purposes of this subsection “deed” includes any disposition, arrangement, contract, resolution, instrument or writing.

So, rather than changing the law of Scotland unconstitutionally, the law draftsman played it safe and simply defined "the deed" as being conclusive as to its fiscal effect therefore limiting any overt extension of the notion of settled property beyond that of the trusts and annuities indicated at a), b) and c) of s.43(2) to legal rights in rem or beyond that of a lease of property which is for life or lives (s.43(3)). Limited as it is to Scotland by way of United Kingdom constitutional competence, s.43(4) does not cover any statutory usufruit granted by law under the French of other code civil to the surviving spouse, or for that matter any French instrument conferring a usufruit.

Perhaps, rather than reasoning by reference to Disney's MacDuck, or by reference to other Looney Toon literature in relation to civil law constructs, a reference to Hans Christian Anderson's fable (see above) should be added to HMRC's IHT manual as obligatory post-Brexit cultural reading in abductive reasoning (abductive reasoning, unlike?deductive reasoning, yields a plausible conclusion but does not definitively verify it.)

"If it looks like a?duck, swims like a duck, and quacks like a duck, then it probably is a duck" - unless, of course, it is abducktively ugly, in which case it is certainly not proven to be a settlement, whether by deduction or otherwise. A Black Swan event perhaps.

Anyone who has witnessed a Swan landing on land will have seen the difficulty that the bird has in landing - even like a duck.