IHT on Greek usufruct

[andy66]

My brother in law (UK domiciled) bought a ruin in Greece in 1994, restored it and in 2020 because of the risk that it might not pass on to his wife when he died, he transferred it into her ownership, retaining a right to use it for life. This is known as a Usufruct overseas but there is no direct UK equivalent.

I am being told that IHT should have been paid at the time of creation, and this will hit hard as the value of the property had risen considerably since he bought it.

He died in 2024 and my sister now has full ownership. I appreciate that IHT will be payable on my sister's estate when she dies, but from a layman's viewpoint it seems unjust that it will also be charged from when the usufruct was created. I'd like to think that spouse exemption would apply.

Anybody?

[AGoodman]

I'm afraid the advice is probably correct.

A usufruct has been considered equivalent to an interest in possession (IIP) for IHT for a while. There have not been any definitive cases although it was touched on in a 2024 case but as background - it was not directly relevant to the decision. https://wedlakebell.com/insights/globally-speaking/new-development-first-decision-involving-usufructs-and-inheritance-tax/

A transfer of value creating an IIP is an immediately chargeable transfer and there is no spouse exemption for a lifetime gift into (what is considered) a settlement for IHT.

There remain arguments that it would not be an IIP (and so not a settlement) as it is not established law (see https://addingtonchambers.com/outcome-bias-is-this-hmrcs-approach-to-the-characterisation-of-usufructs/) but you would potentially have to fight HMRC's published view. IHTM27054

[andy66]

Thanks for the response. I fear we may be on to a loser. I'm getting a valuation to see just how much is theoretically payable, so we can see how much effort to put into this. My sister is now in a rather expensive care home and we are worried about the prospect of having to move her elsewhere. They had no children so I am her deputy along with our other sister.

At the outset I think it was in her husband's name, but would it help if the house had been a joint purchase, thereby she already owned half prior to the usufruct?

[AGoodman]

Yes, if it had originally been in joint names then each would have made a chargeable transfer of half the value - so you can deduct two nil rate bands (£650k) on the transfer before you reach the 20% rate on the transfer in.