In this article we look at the issues that clients face when they have international property, such as forced heirship and taxation.
What is forced heirship?
In many civil law jurisdictions, parties have an automatic entitlement to a portion of the estate under principles of forced heirship. For example, in Scotland, spouses and civil partners, children – and where children die before a parent, grandchildren – have such rights that triumph any Will. Similar rules exist in France, Germany, Spain and to a very limited extent, the US, although the parties protected in each jurisdiction varies. Often those entitled will need to claim (they may choose not to if the Will is more favourable); however, awards are automatic without the need for a value judgement.
The benefit of forced heirship is certainty. The testator has complete testamentary freedom, save for the portion of their estate that passes according to the law to satisfy pre-defined obligations.
The detriment is lack of flexibility, should that portion be less than just in the circumstances. Consequently, the Law Commission of England and Wales called forced heirship ‘alien to our legal tradition’ and rejected proposing its introduction (Law Com No.331, 2011 – para 1.21) in favour of updating the Inheritance Act. However, claims brought under the Act can be unpredictably expensive, time-consuming and stressful with little certainty as to the outcome.
Those with property in a country that has forced heirship rules may be able to circumvent them by using a ‘choice of law’ clause, thanks to EU Succession Regulation (EU/650/2012) (Brussels IV). This was adopted by all EU countries besides the UK, Ireland and Denmark.
What is Brussels IV and how might it affect me?
Under Brussels IV, the law that dictates how your estate passes is the law of the state in which you were habitually resident at the time of your death (Article 21(1)), unless it is clear that you were manifestly more closely connected at death with another state instead (Article 21(2)). Brussels IV also allows you to choose the law of your nationality as the law that applies to how your estate passes, by inserting a choice of law clause in your Will (Article 22(1)).
Therefore, the Regulation can impact:
- Who inherits your property.
- Who can claim against your estate (where forced heirship rules apply, those who have a right to inherit under the law can challenge a Will which doesn’t provide for them; whilst in England and Wales, certain disgruntled beneficiaries may be able to bring a claim under the Inheritance Act).
- Who can administer your estate (in England for example, this is either the Executors or if there was no Will, close family members; whilst elsewhere it is usually the beneficiaries).
- The taxation of your estate (whilst the Regulation doesn’t change the tax law of the country, changing who inherits may).
- Which courts will decide any dispute in relation to your estate.
If you made a Will before the EU Succession Regulation came into force (including a foreign Will), you may need to change it because the advice you received previously may no longer be correct. The fact that the UK has left the EU is unlikely to impact the effect of the Regulation.
What is the impact of the Regulation?
If you are a UK national with property abroad, you will need to know which country’s laws apply to your estate upon your death (and therefore who inherits). Every country has its own laws which govern which law applies. These are called conflict of laws rules and they can be quite technical. The Regulation was introduced to reduce this complication and uncertainty. It brought into effect common rules that apply for all EU member states that adopted it. Whilst the UK didn’t adopt it (and of course, the UK has left the EU), the Regulation still changes how the rules in England and Wales work with the rules of other EU member states.
In countries where the Regulation applies, by default the law of the country that you are ‘habitually resident’ in will govern how your entire estate is inherited when you die. However, this position can be overridden if:
- You were more closely connected to another country when you died (this might be, for example, if you lived your whole life in one country and only moved to another right before your death).
- You include a choice of law clause in your Will which states that the law of your nationality applies to your estate.
Of note, if you make a Will that follows the requirements of the law of your nationality, this law may apply even if you don’t specifically state it.
UK nationals can apply the law of the jurisdiction that they are most closely connected with – for example, the law of England and Wales, or the law of Scotland.
What about countries where the Regulation doesn’t apply?
Where the Regulation does not apply (such as the UK), the country’s conflict of laws rules will. Conflict rules in English law, for example, state that a person’s immovable property will pass according to the law of the country where it is located. “Immovable property” generally means land, the buildings erected on land, minerals in the soil and rights over land. This can mean that a holiday home in Europe can be subject to the forced heirship rules.
By contrast, English rules dictate that how “movable property” passes on your death will be governed by the law of the country in which you are domiciled on death.
How can a choice of law clause help?
A choice of law clause is a clause in your Will specifying that the law of your nationality applies to the Will. It’s important to understand that a choice of law clause isn’t necessary if you don’t have international property. But if you do, applying the law of your nationality to your estate can have some advantages.
- It ensures that your property passes according to rules that you know.
- It can help avoid uncertainty – for example, where you might be considered habitually resident or closely connected with more than one country.
- It can avoid situations where the Regulation does not apply in the Country that you are habitually resident and the country’s conflict of laws rules apply, leading to an undesirable outcome.
- It avoids the scenario where a country’s succession law is automatically applied even though you didn’t choose it, because you previously made a Will in accordance with that country’s succession rules.
Note that the choice of law clause must apply to your entire estate. You therefore need to be careful if you have previously made separate Wills covering assets in different countries.
How does a choice of law clause work in practice?
You and your spouse are British Nationals who live in England, with a holiday cottage in France.
France has adopted the Regulation. If you do nothing, English conflict laws dictate that your immovable property (the holiday cottage) is governed by the laws of the country in which it is located (French law). France has forced heirship rules which will apply in relation to that part of your estate.
You could include a choice of law clause in your Will to say that English law applies. If you do this, France will apply English law in relation to the holiday cottage and you and your spouse can leave it to whoever you like.
Of note, the rest of your estate, i.e. anything that is not ‘immovable property’ will pass according to English law, whether or not you include a choice of law clause.
You and your spouse are British Nationals. You used to live in Birmingham but a year ago you moved to Cyprus and now own a property there. You kept your property in Birmingham which you now rent out.
Cyprus has adopted the Regulation. If you do nothing, Cypriot law will apply, which includes forced heirship rules. This will apply to both your Cypriot and English properties. However, English conflict rules also apply to the property in Birmingham. In short, this means a lot of uncertainty!
You could include a choice of law clause stating that English law should apply. Cyprus would then apply English law to your entire estate, including both houses (the immovable property) and all other non-immovable property you own.
At the time of writing, forced heirship regimes apply in the following countries. Each country has different rules. This list may not be exhaustive:
- Russian Federation
- The Netherlands
- Scotland (‘legal rights’)
- US (very limited, not for children)
Brussels IV applies in:
- The Czech Republic
- The Netherlands
It does not apply in Denmark, Ireland or the UK. In countries where it does not apply, the country’s conflict of laws rules will.
NB: Note that aside from Brussels IV and some limited international treaties, there are no common rules that can be used to resolve conflicts between Private International Law rules. Results can therefore vary depending on the location of your assets and whether a Court accepts jurisdiction. Consequently, the above is intended as a general overview of how international property can be handled in your Will, and not a substitute for professional advice on your individual circumstances.