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Foreign Property – New EU regulations

How should a Will Writer in England & Wales deal with foreign property?

Imagine – you have been asked to take instructions from a couple who have been introduced to you by a valued client and when you step into their comfortable living room you are made welcome by their generous hospitality. This should be straightforward I hear you say, plenty of opportunity for referrals and a sensible fee for the work – no problem!

Once settled to your task they announce that in addition to assets in the UK they also own property outside the UK. Now you have an issue – what can you do to ensure that they deal with that property effectively? What must you do to be certain that the arrangements you make are not complicated by the need to deal effectively with the foreign property?

This month we take a look at some of the issues that you will need to consider when examining ways for your clients to deal with foreign property whenever you find it.

You may not have come across this situation before? Testators who own foreign property, are becoming increasingly commonplace. Not only UK-domiciled testators who have bought property abroad, but more and more non-UK-domiciled testators, who own foreign property are to be found in the UK. All of these people require advice about how to structure their Wills.

Should you be thinking about a single universal Will dealing with their worldwide assets or alternatively would a local Will governing the distribution of their foreign property be best advice?

This question will need to be examined not only from the point of view of testamentary dispositions in the foreign jurisdiction, but also in terms of the procedures adopted by the Probate courts in England & Wales.

A local Will disposing of foreign assets must fit together with the provisions of an English Will, consideration should be given to determine whether the provision of a local foreign Will either revokes or does not revoke the English Will.

If the foreign Will does not affect the English Will the Probate court is likely to ask only for a basic translation of the foreign jurisdiction Will. On the other hand if the foreign Will revokes any part of the English Will, the foreign will is treated as a codicil, and the English Probate court will require evidence that the foreign Will has been validly executed under the relevant foreign law.

To avoid such a situation the English Will should be restricted so that the foreign property is excluded from the English Will. If the local will is added later then a codicil will need to be added to the English Will revoking the provisions of the English Will as they are affected by the later foreign Will.

The order of execution is important and the codicil restricting the effect of the English Will must be executed before the foreign Will. If this is not possible a new English Will must be executed, which excludes all effect over the foreign property.

If a decision is made to use an English Will over the testators’ worldwide assets the Will Writer should give thought to the way in which the estate will be administered. The English Probate court is not able to exercise effective control over foreign non-UK property. The degree of control will depend upon the situs of the foreign assets. (Situs: Latin in law meaning place). The English Will executors’ will have only restricted responsibility for administration of the foreign asset.

For example the executors will usually require specific authority to deal with the non-UK assets. The English executors have no obligation in law to settle foreign liabilities or to collect foreign assets.

However English executors of UK domiciled testators have a duty to declare ALL of the deceased’s assets to HMRC (s216 IHTA1984) and by the provisions of s200 IHTA1984 the executors are responsible for the value of inheritance tax as charged on the deceased’s worldwide assets, irrespective of situs. If the foreign jurisdiction assesses the foreign property for tax then there may be scope for tax relief based upon an existing double taxation agreement (s159 IHTA1984).

The key principle is that it is the foreign jurisdiction that has authority to determine the succession rules appertaining to the foreign property. The Will Writer should consider whether an English Will is formally valid in the foreign country? If it is valid – is it fully valid or only partially valid?

Validity of the Will:

English International law holds that it is the law of the testator’s domicile that determines whether or not the testator can make a Will dealing with movables (tangible items of property other than land and goods fixed to the land [ie: immovables]). The general proposition is that it is the law of situs which governs the testator’s capacity to make a Will dealing with immovables.

We need to take a look at the provisions of the Hague Convention of October 5th 1961. The Hague Convention holds that a Will can be treated to be valid as regards its form if the Will was made in accordance with the law of the country where the Will was executed or where the testator was domiciled or resident either at the time the Will was executed, or at his death. The Convention stands for the proposition that a Will dealing with immovables is valid if it conforms to the law of the country where the property is situate – the law of situs.

For a Will executed in England & Wales, other than certain privileged Wills, the Will is valid if it has been executed in accordance with the provisions of s9 Wills Act 1837.

Interestingly, although the case was not heard in the English courts, there is a recent case in an Australian court which considered the validity of a document purporting to be a Will made on an I-Phone, see Re Yu [2013]. The document named an executor and gave instructions on the disposal of property. Although clearly not in writing, nor signed or witnessed as required by the Queensland Succession Act 1981 the court noted that the Act provides for recognition of informal Wills under certain conditions and held that the conditions were wide enough to include the I-Phone record and issued a grant of probate to the named executor.

In Marley v Rawlings [2014] UKSC 2; [2014] 2 WLR 213 the Supreme Court ordered that a Will be rectified as a result of clerical error under s20 Administration of Justice Act 1982. The facts were that the husband and wife executed each other’s Wills in error. The court’s decision in this case represents a widening of the previously held narrow interpretation of clerical error justifying rectification. The solicitor’s error was held by the court to be within the meaning of clerical error.

The effect of the Hague Convention is for courts to look actively to confirm the validity of a Will; however it may be the case that certain elements of a Will cannot be operative if the foreign law is not able to assist. For example in jurisdictions that operate rules of forced heirship, gifts made by a Will of more than a certain proportion will not be valid if they override the rights that certain classes of family relations have under the local law governing the permitted dispositions of movables and/or immovables. Generally the law of situs governs the disposal of immovables, but the disposal of movables can be dependent on the law of domicile or residence or nationality. This can easily give rise to confusion based on circular referrals and present real difficulties for the executors.

Tax calculations may be affected by foreign law when compared with English tax law. Double taxation agreements do not exist between the UK and every foreign jurisdiction. The idea of executorship is not universally recognised and English executors may be unwise to attempt to act in dealing with foreign property in case their involvement could cause the foreign tax liability to increase.

Domicile:

Determining the testator’s domicile can be complex. A Will Writer should always consider whether specialist advice is required when the need to assess the testator’s domicile accurately will affect testamentary advice.

The introductory notes on domicile provided by HMRC for executors completing form IHT400 (in particular IHT401) are instructive. Section 6 of IHT 400 Notes on Page 10 provides the executors with notes which indicate where a deceased person may not have been domiciled in the UK. Helpfully the notes list the special rules that if applicable, mean that deceased can be treated as UK domicile. One result of being treated as UK domicile is that inheritance tax must be paid on the deceased’s worldwide assets. If there is a double taxation agreement with any foreign country where assets were held then the terms of that agreement must be taken into consideration.

Having a discussion with your client about domicile will help you to decide how to deal with foreign property. Domicile can be difficult to determine and having a copy of IHT401 to hand when interviewing your client may be helpful in demonstrating your attention to this matter. The form asks questions relevant to the need for specialist advice.

Where foreign assets are involved, in particular immovable property, competent local advice will be needed before deciding whether to draft a universal English Will that takes effect over the foreign property or alternatively whether to recommend a local Will is drawn up over the foreign property. The penalty for giving testators inadequate advice will likely be an increase in the problems and therefore the cost of administering the estate. If the advice given is to draw up an English Will and a local Will, then care must be taken to ensure the testators understand how the Wills interact and how they must be executed, see above.

The European Union’s (EU) approach to these problems:

The EU has been attempting to harmonise these issues across borders for many years. The Commission issued a Green Paper in 2005 on succession, which focused on the different rules on succession and decisions about which law should apply, which jurisdiction to use and how to remove practical and administrative barriers when dealing with Wills made by testators with assets in cross-border jurisdictions. Of course the Commission was considering the relationship between the European jurisdictions and did not address the issues of assets with situs in other territories of the world.

The resulting EU Regulation was adopted by the European Parliament on 13 March 2012 and came in force on 17 August 2012, with most of the provisions applying for deaths that take place after 17 August 2015.

The details released in the introducing Press Release noted: “all EU member states adopted the Regulation except Denmark, which has an opt-out for justice and home affairs matters, and the UK and Ireland which did not opt-in to the initial proposal within the 3 months period allowed for those 2 member states”.

The Press Release introducing the Regulation continued: “The new rules make life easier for heirs, legatees and other interested parties. They will speed up succession procedures in cross-border situations and will make it easier and less costly for heirs and legatees as well as for persons entitled to reserved shares to take possession of their respective parts of the estate. Upon commencement the rules will ensure that:

The succession to the estate of the deceased person will be dealt with as a whole, irrespective of the nature or location of the assets;

One single authority will be in charge of the succession, and

One single law will apply to the succession”.

It is not clear how the Regulation will work in practice after August 2015, especially between the UK, which has not opted-in, and a jurisdiction where the Regulation is fully applicable. The effect may be that a British national who has become the habitual resident and acquired domicile of a participating European Union jurisdiction can elect for English succession law to apply to his whole estate and thereby avoid any local forced heirship rules that would otherwise apply. The Regulation further provides that the applicable law should also govern “the powers of the heirs, the executors of the Wills and other administrators, in particular as regards the sale of the property and the payment of creditors”.

A British national who has made the election that English law should apply to his testamentary intentions should therefore expect that the administration of his EU estate, including EU immovable will be dealt with under English law.

As matters stand presently this will increase the authority of UK executors and unless there are substantive changes to English law there could be conflict and confusion between English law and the EU law of the country involved.

Legacies of Foreign Property:

From the foregoing the Will Writer can reasonably conclude that it is not easy for the British national owning property abroad to decide whether he can rely on the provisions of his English Will. Can he use the English Will to cover foreign property or should he use a local Will?

The Will Writer’s aim is to give effect to the testator’s wishes while avoiding or at least reducing the potential effect of disputes, delays, administrative expense and excessive tax charges. When dealing with cross-border estates the draftsman must take account not only of the domestic rules of succession, administration and taxation issues, but also the effect of international law upon those rules.

The first step is to identify the assets, their location (situs) and details of who owns the property and the extent of their interest underpinning the ownership structure. What needs to be known is what exactly passes under the Will; is it the asset itself and/or the testator’s rights under a nominee agreement? Where local rules embrace a matrimonial property regime, the surviving spouse may take automatically (such as with a joint tenancy), which means that not all assets may pass under the Will.

Once the Will Writer has established the identity of the assets affected by the Will the following may be the main considerations:

Validity of the Will – what form should the Will take so that it may be proved in the relevant jurisdiction – where the foreign assets are situated? Is the jurisdiction one that has ratified the Hague Convention?

Material Validity – even if the Will is in the correct form and can be proved, will it be effective to deal with the property in the situs location? Is the Will being drafted with provisions that would be specifically overruled by the law operating in the situs jurisdiction? For example: do the local rules of a forced heirship jurisdiction apply or would the law of the testator’s own residence apply? In the event that there is a referral back to another jurisdiction, in this example to the jurisdiction of the testator’s residence, does the situs jurisdiction accept that referral? This referral mechanism is known as “renvoi”. (Please conduct your own reading into the effect of “renvoi”.)

Administrative convenience and efficiency – even though an English Will may be both formally and materially valid in the situs jurisdiction, nonetheless will there be administrative complications, leading to expense and delay during the administration of the estate?

It may very well be possible to reseal an English Will in a foreign jurisdiction of situs but the delay involved may mean that local issues have to be put on hold while the requirements of the individual jurisdiction are satisfied. Far better perhaps to draft a local Will, one that can be proved quickly without administrative fuss and with the minimum of cost and delay. This would be especially true in the event that a sizable inheritance tax bill had to be paid before the application to the English court can be made.

If the situs jurisdiction demands that a full local grant and not a reseal is needed to deal with the foreign assets of a British national, there will usually be a requirement for formal proof of the English Will, ie: the grant. An affidavit may be acceptable but foreign authorities are usually happiest and may insist on, an English grant. This will involve making a translation of the English Will at additional cost.

But note: the concept of a trust is peculiarly English and does not often appear in other jurisdictions, with the result that the familiar (to us) phrase “on trust for “A” absolutely” is not likely to be understood. Also in many European jurisdictions the tax charge is calculated by reference to the blood relationship of the testator to beneficiary resulting in much higher tax rates than those found in the English tax system.

Potential disadvantages of using a local Will:

Where the entrepreneurial testator presents a number of foreign properties in separate jurisdictions there is an obvious danger that local Wills can inadvertently cause the revocation of one local Will by another. In order for the revocation to take place most jurisdictions require that strong evidence of the testator’s intention is established.
Obtaining evidence of and proving the testator’s intention will cause delay and the correction of mistakes will be time consuming and costly.

The settling of debts and liabilities is another area potentially prone to confusion, especially where separate Wills are used in separate jurisdictions appointing individual executors responsible for assets located in each jurisdiction.

Individual sets of executors may not have sufficient information to prevent the distribution of assets under their control where other parts of the estate are insolvent and unable to meet their own liabilities. Who will be responsible for the shortfall, what precautions should executors take before authorising distributions?

It is not difficult to see that serious problems can affect an estate with assets held in a number of jurisdictions, when the testator chooses to create a number of stand-alone local Wills. Despite the issues of dealing with property and the resulting issues in a multitude of jurisdictions the use of a single universal Will may present a single set of executors with less of an administrative burden.

Some of these problems are addressed by the EU succession Regulation, which comes into force on 17 August 2015, see above. However the UK has, so far at least, not decided to embrace the Regulation and is therefore not, at least for the time being, bound by its terms. Nonetheless the Regulation will undoubtedly affect UK-based testators who have assets in other EU countries (except at present Ireland and Denmark). The precise implications after 17 August 2015 are as yet unknown

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