Inheritance tax and an usufruct
Tax Question:
Thank you for your answers to my previous two questions which were most helpful. I have one further question.
I am non-dom and wish to donate my flat in Italy to my daughter. If I have the usofruct (use of the flat till my death when it would pass directly to my daughter) and pay a market rent when I stay in the flat would the flat pass to my daughter free of IHT or do I have to donate the flat outright and pay market rent.
Best wishes
Answer:
Firstly I assume that you are deemed domiciled in the UK (ie more than 17 years of UK residence), otherwise your overseas estate would be outside the scope of UK in any case due to your non domiciled status.
In terms of the usufruct, as far as I understand it, it is essentially a life interest with you having the beneficial entitlement to the property. In this case the value would remain within your estate. The market rent comes into play when you make a gift and reserve a benefit, however if you simply gifted the legal title and retained the beneficial/life interest this should not be an issue (as the property value is still within your estate).
Therefore I'd expect that the property would need to be gifted outright in conjunction with the market rent for the value to be excluded from your estate.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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