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Foreign Property

Business in Wills

Business in Wills

In this month’s online CPD we will be examining how to plan estates for clients who own property in a foreign country and to ensure the best method of advising clients who are in this situation. This article will also look at some of the dangers in giving poor advice and also
look at some working examples of international estate planning. We will also examine the proposed changes in this area within European Union for the future at the end of this article.

All will writers in various situations will come across clients who own foreign property. This can lead to possible problems; especially if this is not dealt with in the correct manner, as you could be accused of giving negligent advice if this is not accurately handled.

First of all you need to remember there is no international law in place with regard to succession law within the EU which the UK currently abides too. With regard to the jurisdiction which will apply is often determined by where the testator is either domiciled or seen to habitually reside at the date of their death. This means you will have to consider how this will affect the testator on death and which succession law the client’s property will be subject to.

The first problem arises when we examine the differences between the types of legal systems which exist worldwide. The differences between these two legal systems can lead to a conflict in terms of how succession law works in cross border succession cases, as we shall see in this article.

One of the main concepts of the English succession law is that we as British citizens, have the power or freedom to dispose of ones assets, as the testator would wish in their will. However in other legal jurisdictions this freedom is replaced with the concept of the rule of ‘forced
heirship’.

Although the power of testamentary freedom has been eroded to some degree in both England and Wales due to the Inheritance (Provision for Family and Dependants) Act 1975 i, this is still not as rigid as the civil law legal system which operates the doctrine of ‘forced heirship’ which dictates how a testator’s property will be distributed.

Also civil law systems often subscribe to a different matrimonial property regime, so the spouse is treated as owning 50% of all the assets acquired after marriage. Therefore each spouse can only deal with their interest in the matrimonial assets and not the whole estate irrespective of who provides the funds. This type of system is referred to as ‘community of property’ ii. Inevitably issues do arise if estates are over cross boarders and in this article we will look at the reasons why separate wills are the most suitable method of dealing with different assets held in different jurisdictions.

It is important to understand the principle of ‘forced heirship’ and the effect this will have on an individual’s estate. The principle of ‘forced heirship’ is a method of ensuring that an estate is divided into fixed proportions. This will allow a certain class of individuals (i.e. a spouse or children) to be able to receive a certain percentage of the deceased estate, even if this is not what the deceased would have wished or stated in their will. It is also important to know that in some countries a lifetime gift may be clawed back, for example, a child may be
able to recover assets given away by the deceased before their death.

Also in some countries, for example Italy, they refer back to the country of nationality for the law relating to succession for all types of property. Thus Italian ‘forced heirship’ rules will not apply to any assets left by U.K. citizens, no matter where the deceased is domiciled or is habitually resident at the time of death.

In other countries these forced inheritance rules do however extend to non-nationals. Commonly, the domestic law is applied to land while the law of the country of domicile (or habitual residence) is applied to moveable property.

In contrast if we look at another example where an English person dies owning assets in France, French law will apply and the rules of ‘forced heirship’ will apply to any land held by the testator, but French law will refer back to English (private international not domestic) law
for any movable property.

The concept of ‘forced heirship’ will not be applicable to England dispositions made by a will, if the testator dies domiciled in another country, the country’s jurisdiction will mean their succession law will be imposed as seen in the case of In re Angus Will Trust iii.

In French law it provides that if the rights of French heirs are defeated in relation to worldwide assets, they can claim French assets in satisfaction of their ‘worldwide rights’.

Thus an English person with a French spouse and French heirs could find that the whole of any French property would go to their French heirs, whatever their will might say. Different jurisdictions have different claw back periods an example of claw back in France is it allows a claim up to a period of 30 years from when the testator died iv.

It is relatively easily to change the nature of an asset. For example, where land is held through shares in a company, the asset owned is shares not land and this will escape the ‘forced heirship’ rules applicable to that of land. Owning land through a company in France may, however, have adverse capital gains tax consequences and so it is for clients to take local legal advice on this subject and see how the rules of ‘force heirship’ would affect their rights of ownership v.

Good advice would be that the client makes an English will to deal with their assets in the UK and instruct a foreign lawyer to advise in regards to any possible succession issues with regard to that country in which he specialises. This ensures that both estates are planned effectively.

Another principle which needs understanding is the idea of community property. This refers to property which is owned by a husband and wife and gives each of them rights to each others property throughout their marriage, with any such rights continuing after the death of one of the spouses. Where community property applies, the husband and wife may be precluded from giving it away, or giving away more than their share.

The community rights which arise under foreign law on marriage will not be lost by a subsequent change in domicile to a new jurisdiction (such as England which has no community rights). An attempt by will to dispose of more than the freely alienable share in the community property will fail, even if the person concerned died domiciled in England. In some jurisdictions couples can elect, at the date of the marriage, whether or not they want community property to apply?

Therefore the question arises as to how many wills a testator needs? The best advice and, in order to ensure the smooth running of a cross border estate planning, is to have a will in each country to deal with any foreign assets, Below are three reasons for this are:-

1) A local lawyer will be able to advise with regard to any regional problems which could arise from inheriting in that jurisdiction, i.e. are they governed by fixed inheritance laws for example ‘forced heirship’. Although these should have been investigated at the time the property was first acquired. vi

2) A will which is made in the form and language of the local legal jurisdiction. This will prove to be familiar to local institutions; therefore, dealing with those assets would be made easier. vii

3) Civil law and Islamic jurisdictions do not recognise the concept of roles of executorships in the same way as we do in England and assets are usually vested in the heir direct. Executors appointed under an English will are, therefore, unlikely to be able to take any effective steps to acquire titles to any foreign assets. viii

Currently, a common problem which can be seen with today’s wills is that solicitors and will writers have been placing specific legacy clauses in the testators will in an attempt to deal with foreign property; however this is often done without understanding fully the impact of what actually happens on the testator. If an English will is created with any foreign property included in it by the use of such a specific clause, there could be a number of issues you will need to consider which are shown below.

The first is with regard to the local language used in the country where the foreign property is held. In almost all cases this will be different languages to that of the UK will and, therefore, the UK will needs to be translated into the local language at additional cost to the clients
estate.

Secondly, unless the individual is an expert on international succession law, i.e. foreign succession law or foreign property law in the jurisdiction where the property is held, we should not be giving any such advice in regards of this matter. I would not expect an average Greek attorney to know a lot about English succession law; therefore, he should recommend that his client seeks advice from an advisor who does know the relevant law and to ensure that his client receives the correct information. This is a standard duty of care issue.

The third matter that you must consider is whether your indemnity insurance covers you to give international succession advice? If a beneficiary or a widow/widower feels you have provided inaccurate advice, are you covered?

Finally, an important point which also needs to be considered is the effect of having one will in place as this may slow down the process of administrating the deceased estate, whereas when more than will exists, it allows the executors or the personal representatives to put both
wills into the appropriate probate courts at the same time and speed up the whole probate process.

As we can see from the points mentioned above, there is some importance in creating more than one will and ensuring the client gets the best advice to make the probate process easier for those who are dealing with it.

If the client is making more than one will, however, it is important to ensure that each will deals only with assets situated in that particular legal system, and that the will contains a limitation clause to ensure the current will does not have the effect of revoking any other will
written specifically to cover foreign assets. An example would be as below:-

‘I revoke all earlier Wills to the extent that they relate to any part of my estate in any part of the world other than Spain.’

If the will does not contain a limitation clause (as seen above), this can create problems as the last will created will be seen to be the last will written, unless the will clearly states it is meant for a certain jurisdiction, i.e. ‘My Spanish will is to deal solely with my Spanish
assets’.

This occurred in the case of Re Waylands Estate ix. In this case a British subject domiciled in England made a will in Brussels to deal specifically with his Belgium property. A few months later he made a will in England which contained the general revocation clause and which had a declaration stating, ‘this will is intended to deal only with my estate in England’

When giving the instructions for his English will, he informed his English solicitor that he had already made a will in Belgian with respect to his estate held in that country.

The court held that the revocation clause in the English will was intended to only revoke all former wills dealing with English property and was not intended to revoke the Belgian will.

It is essential to consider whether a will is valid. Section 1 of the Wills Act 1963 x provides a will is to be treated as properly executed if made in accordance with the international law of a country:

a) Where the will was executed;
b) Where the testator was domiciled or habitually resident; and
c) Where the testator was a national at the time the will was executed or, at his death.

Section 2 of the Wills Act 1963 xi provides other ways which states a will is validated. Particularly useful is section 2(b) of the Wills Act 1963 xii, which provides that a will is valid ‘so far as it disposes of immovable property, if its execution conformed to the international
law in force in the territory which the property was situated’.

When we have clients who have foreign property we should look at providing a checklist to ensure no issues arise (see the end of this article).

In an ideal world a client buying property in another country should always make a will at the same time in order to deal with this property, but unfortunately this is often not the case.

If the property is already owned then they should instantly be advised to consult a lawyer within that local jurisdiction. The best results are achieved where the firm preparing the will for England and Wales has links or contacts with a firm in the local jurisdiction within which the foreign property is purchased. This allows both estate planners to work together to ensure effective estate planning is achieved.

The question which arises is what does the future of the law of succession in cross border cases hold? Currently the succession law in cross border succession cases is a complex matter, as the law of one member state varies considerably from one EU country to another.

The differences which exist at the moment are looking to be addressed in the future under the new proposed uniform rules of the ‘European Certificate of Succession’ xiii. These new rules undertake to bring EU members under one set of rules which were adopted on the 4th of July
2012 and came into force in on the 17th of August 2012 xiv.

These set of rules will hopefully have the effect of making the problem of any international will or succession matters easier to handle. These rules are looking to be in full operation by 17th of August 2015 within the European Union to those members who have signed up to the
regulation xv.

The effect of above regulation would give succession a unified approach in providing a single law which allows European citizens to be governed by the succession laws which are applicable to their estate determined by where the testator is domiciled, habitually resides or the country which they are a national.

This would avoid the problems that have occurred in the past, i.e. parallel proceedings and conflicting relating judicial decisions. Instead this will ensure that there is a mutual recognition on decisions within the EU sphere in regards of succession matters.

However, the initiative in no way alters the substantial national rules relating to succession, and the following succession issues continue to be governed by national rules. Issues such as, who will be able to inherit, i.e. ‘forced heirship’, the property law and family law will remain in control of the EU country and tax arrangements will still be determined by the member state xvi.

The European Commission has seen the idea of ‘European Certificate of Succession’ will provide faster, easier and cheaper procedures compared to the current ones in place which create difficulties in exercising rights in dealing with estates over cross borders.

At this moment in time the stance of the United Kingdom and Ireland is to opt-out xvii of the scheme due to concerns over the issue of “claw back” policy. This policy of claw back as caused many issues as the UK government strongly disagree with the concept of claw back and while this matter continues to be unresolved the UK will be unlikely to sign up to the Regulation 650/2012 xviii.

Conclusion

What we have shown is there are a lot of issues in working with cross border estates and care needs to be taken to ensure the client is given the correct advice. The will writer needs to discharge their duty of care by ensuring the client gets the best advice in all in respect with regard of tax, succession, property law and as to the process of what happens on death in a foreign country. If this is not done it could leave an opening to potential negligence claims.

Checklist of points which need to be considered:-

a) The client should disclose to the will writer that he has a will dealing with all assets except those in the local jurisdictions (i.e. where the foreign property is held). The client should be prepared to show the will to their foreign lawyer.

b) The client should tell the will writer that he wants the will limited to the foreign property and without a general revocation clause. The client should ask the local will writer about the succession laws within this jurisdiction to grasp an understanding of how it works.

c) The client should ask the will writer whether there are any fixed inheritance laws. If so, are there any ways of circumventing those provisions, including dealing with succession outside the terms of a conventional will, such as, holding the property in a company or trust or co-owning it?

d) The client should ask the will writer who will deal with the transfer of the property after death, will this transfer be done by executors or beneficiaries? If the work is done by executors, who could or should, be appointed? Is it feasible to appoint the same executors as the ‘home will’?

e) The client should ask the will writer to explain what the tax position is on death. How will ownership of the foreign property affect UK inheritance tax, bearing in mind that the foreign property will be treated as part of the UK estate for inheritance tax purposes? Are there any double taxation treaties that are applicable?

f) The client should also ask the will writer whether there are any additional costs, such as providing for an English translation as well as any registrations in the local jurisdiction.

Please have a look at the examples which are provided below to see how the succession laws vary between two different European states.

i Inheritance (Provision for Family and Dependants) Act 1975, see link http://www.legislation.gov.uk/ukpga/1975/63
ii A Practitioners Guide to Wills, 3rd Edition, Lesley King, Keith Biggs and Peter Gausden,
iii Re Angus Will Trust [1960] 1 WLR 1296,
iv French Civil Code,
v Oxford Dictionary of Law, Oxford University Press, pp235,
vi As suggested by Lesley King and Peter Gausden
vii As suggested by Lesley King and Peter Gausden
viii As suggested by Lesley King and Peter Gausden
ix Re Waylands Estate [1951] 2 All ER 1041
x Wills Act 1963, Section 1, http://www.legislation.gov.uk/ukpga/1963/44/section/1
xi Wills Act 1963, Section 2, http://www.legislation.gov.uk/ukpga/1963/44/section/2
xii Wills Act 1963, Section 2, http://www.legislation.gov.uk/ukpga/1963/44/section/2
xiii Regulation (EU) 650/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 4th July 2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance enforcement of authentic instruments in matters of succession and on the creation of European Certificate of Succession,
xiv European Commission, Article on Succession and Wills, ec.europa.eu/justice/civil/family-matters/successions/index_en.htm
xv European Commission, Article on Succession and Wills, ec.europa.eu/justice/civil/family-matters/successions/index_en.htm
xvi Article European Affairs, Who gets what when I die, www.euronews.com2012/10/29
xvii BBC, Article ‘MEPs welcome new cross-border law’ www.news.bbc.co.uk/democracylive/hi/europe/newsid_9702000/9702662.stm
xviii Regulation (EU) 650/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 4th July 2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance enforcement of authentic instruments in matters of succession and on the creation of European Certificate of Succession,
Included in this paper are a couple of examples for you to see the practical differences which exist within two of the European Member states with regard to how succession law works.

The examples below are from the Spanish and French legal systems.

Example 1

Mr. and Mrs. Wood’s assets are as follows:-

1) A property in the UK worth £300,000;

2) They have £100,000 in the bank; and

3) They own a property in Spain worth £150,000 (which is held as tenants in common).

The will writer advises that on death the spouse tax exemption will take place and on second death they will have £650,000 IHT free. The English will is written with a clause giving away the foreign property and states no tax will be liable.

Mr. Wood then dies in England, the estate is administered quite simply. The Spanish property is valued at £75,000 [being the one half share].

Property in Spain is held in a system similar to that in England in relation to ‘tenants in common’.

When the Spanish estate comes to being dealt with, there is a problem. The NRB [NRB equivalent/ tax free allowance] in Spain is 16,000 Euros provided that the property is left to the surviving spouse.

Therefore. There is a local IHT to pay of £75,000 – 16,000 Euros which means the tax will be 56,000 x approx 10% = 5600 Euros, plus any local and land registry fees (say, another 4000.) equaling a 10,000 Euros bill on first death.

Mr. Wood’s share in the Spanish property passes to Mrs. Wood which increases the size of her UK estate as she now owns all of the property in Spain, which again poses potential problems.

To do this it will be necessary to take the UK Grant of Probate and Will and have them legalized at the Foreign and Commonwealth Office under the Hague Convention and then officially translated into Spanish [the local language]. The same is necessary with the death certificate as this also needs translating. The documents are then sent to the notario in Spain, usually together with a Certificate of Law, and the Notary will authorise an inheritance Deed which, when presented to the Property Registry (after taxes have been paid), will enable the transfer to be registered of that half share of the property of the deceased over to the surviving spouse.

Should there be a Spanish will, the process will prove much easier and quicker, and usually the notario will not ask for sight of the translated English will or Grant of Probate but simply proceed under the Spanish Will Mrs. Wood has now completed the administration in Spain, accepting her husband’s half share of the property. This means her interest in the Spanish property has doubled and now owns not 75k but 150k. This also means the IHT bill in Spain will be double on her death, her actual net worth, as far as the UK tax authorities are concerned, is now 150k instead of 75k which could take her estate over the dual nil rate band rate especially if property values increase in Spain.

The NRB [NRB equivalent/ tax free allowance] will remain at 16000 Euros but this time the value of the property will be at least 150,000 Euros – so the succession costs and taxes will be around 18- 20,000 Euros. Potentially one small property can lead to gross taxes and fees in Spain of 30,000 Euros or more.

It can be seen therefore, that professional advice could have avoided some of the above problems for the clients, reducing the total tax bill significantly and paving the way for a more economical and speedy legal succession process i.

Example 2

Mr. and Mrs. Wood are married with one child from this marriage. Mr. Wood had previously been married and has three children from that marriage.
Mr. Wood dies leaving everything to Mrs. Wood. However, Mrs. Wood learns that the house is currently owned held en indivision (which is French equivalent to Tenants in common). French succession law overrides her late husband’s English will and, again, this contained a specific gift of property. Therefore, the husband’s half of the house has to be split in the following way: three-quarters between Mr. Wood’s four children and
the last quarter going to Mrs. Wood. Mrs. Wood, therefore, does not get the interest she thinks or was promised under her husband’s English will.

The house is then owned between Mrs. Wood and all four children. Furthermore, under French law, any person owning a part share en indivision can force a sale on the other part-owners, or ask to be bought out.

However, Mrs. Wood can improve her position by taking a life interest (usufruit) over the whole property instead of or, in addition to, owning a quarter of her husband’s share of the property. In so doing, she prevents the children from selling against her will because the French Civil Code states that the court may not, at the request of the remainderman (the children in this example), sell the freehold of a property charged with a life tenancy against the wishes of the life tenant.

None of this would have arisen had the property been placed in en tontine (this is the French equal ant to Joint Tenancy). On Mr. Wood’s death, his share would automatically have gone to Mrs. Wood. It is possible for the children to seek redress through the courts if they believe that they have been intentionally defrauded from their inheritance, but such action can be expensive and the English rarely do so.

N.B. the point of En tontine can only be inserted at the time of purchase and not at a later date. This is often seen as an action in succession law against the potential children and is hardly ever used.

However this could also create problems as a sale needs consent to be granted by both the legal owners and in relation divorced couples causes other problems.

It is also important to note that this can affect co-habiting couples with regard to any foreign property held. For example, in France non-relatives i.e. a cohabiting partner couple would face some problematic situations if the advice is not correct. Therefore a cohabiting owner survivor would pay inheritance tax at a rate of 60% with a tax-free allowance of just 1,500. Euros ii.

Below is a brief guide to the Inheritance Tax in terms of French Inheritance Law.

Band of Taxes for each beneficiary in Euros,

Children                                                  Spouses
Amount                  Tax applied        Amount                        Tax applied
First 50,000.       0%                         First 76,000.             0%
Less than 7,600.    5%                      Less than 7,600.    5%
7,600.-11,400.      10%                  7,600.-15,000.      10%
11,401.-15,000.     15%                  15,001-30,000.      15%
15,001-520,000.     20%                  30,001.-520,000.    20%
520,001-850,000.    30%                520,001.-850,000.   30%
850,0000-1,700,000. 35%                850,001.-1,700,001. 35%
1,700,001,+                    40%                1,700,000.+                    40%

One basic example is where property worth 500,00 Euros of a family consisting of wife and four children

Estate Valuation        500,000,
Wife’s allowance         76,000,
4 children (50k each)   200,000,
Global Allowance         50,000,
Taxable estate          174,000,

i Example 1, adapted from Mike Smith’s conference notes 2010 and additional input from Andrew Eastwood, both have considerable experience of dealing with property in Spain.

ii Example 2, adapted from notes from article on Inheritance by Chez Riviera entitled ‘Guide to French succession and Inheritance tax issues’.

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