How are usufructs treated for UK inheritance tax purposes?

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A usufruct is a common way of holding property in many countries in Europe (including France, Spain, Italy). HMRC has recently confirmed its view that a usufruct will, in most cases, be treated as an interest in possession (or life interest) trust for UK inheritance tax (IHT) purposes.

The IHT treatment will depend on whether the usufruct was created before 22 March 2006 or on or after that date. An immediate charge to IHT on the value of the assets made subject to the usufruct will arise where the usufruct was created on or after 22 March 2006. In addition, there will be a charge to UK IHT every 10 years on the value of the assets subject to the usufruct and a charge on assets ceasing to be subject to the usufruct. Where the person who is treated as the settlor of the usufruct was not domiciled (and not deemed domiciled) in the UK at the time it was created, only the UK assets subject to the usufruct will be subject to UK IHT.

Under an usufruct, the usufruitier (usufructary) has the right to use or occupy the property, which is subject to the usufruct, during their lifetime. The property is legally owned by the nue-propriétaire (bare-owner) but selling, letting or mortgaging the property usually requires the usufructuary’s consent.

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