Usufruct and UK IHT

[MrUK]

Hi,

I wonder if I may have some advise please.

Myself and my wife own a property in Malta and would like to gift this to our daughter and set up a usufruct.

Our daughter would be the Bare Owner of the property and we the usufunctuary (rights to reside / use the property during our lifetime).

Other information

All 3 parties are UK resident and UK domiciled for tax purposes.

The value of our estate is well in excess the nil rate band for UK IHT.

Upon our deaths, our daughter would inherit the Maltese property.

Question

How would HMRC treat the Maltese property for Inheritance tax (IHT) purposes. We would like to make sure that the property falls outside of the IHT net if possible and wonder if the usufruct will bring it into the estate ?

Any help much appreciated.

[AGoodman]

The law itself is unclear but HMRC have published their view that they are settlements for IHT:

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm27054

Things can get a bit complicated as HMRC do not necessarily apply this analysis for capital gains tax and English law generally doesn't cover usufructs. This article explains the CGT approach by reference to Scottish liferents which are very similar.

https://www.russell-cooke.co.uk/media/r3yljyyv/usufructs-part-1-uk-capital-gains-tax-private-client-business-issue-5-oct-2011.pdf

[AGoodman]

I should add that, as you will be retaining an interest, the property will remain in your estates for IHT and therefore a usufruct would not save you any UK IHT.

[MrUK]

I should add that, as you will be retaining an interest, the property will remain in your estates for IHT and therefore a usufruct would not save you any UK IHT.

Ok, many thanks AGoodman for this reply, this clears up the issue for me.

[MrUK]

I should add that, as you will be retaining an interest, the property will remain in your estates for IHT and therefore a usufruct would not save you any UK IHT.

I thought this might be the case

[MrUK]

It appears then that we will have to transfer the property to my daughter without us having any further interest and pay the CGT on the uplifted property value. Presumably then the 7 year rule relating to gifting would then be applied.

[AGoodman]

You'll also want to adhere to this guidance on reservation of benefits to ensure the property leaves your estate for IHT.

[MrUK]

You'll also want to adhere to this guidance on reservation of benefits to ensure the property leaves your estate for IHT.

Will do. Yes, I can see that this is imperative as it would cause some issues. Many thanks