New rules governing the inheritance of second homes on the Continent come into force today, explains Eilidh Adams
A EUROPEAN Union Regulation, which comes into effect today attempts to harmonise the rules on succession within the EU and could have implications for Britons with second homes on the continent.
The Regulation is complex and its practical effects are not yet fully understood
It is common for people to have assets in, and connections with, multiple countries, each with their distinct set of laws governing issues of succession and testamentary freedom. Where those laws conflict, it can be a time consuming and costly process for those involved in administering an estate after death to establish which rules take precedence and how they interact with the provisions of any Will.
Whilst the UK (along with Ireland and Denmark) has opted out of Regulation (EU) No. 650/2012, generally known as the European Succession Regulation, or Brussels IV, its application within the wider EU may impact those with property in, or connections with, other EU countries.
The purpose of the Regulation is explained in its preamble: “The proper functioning of the internal market should be facilitated by removing the obstacles to the free movement of persons who currently face difficulties in asserting their rights in the context of a succession having cross-border implications. In the European area of justice, citizens must be able to organise their succession in advance. The rights of heirs and legatees, of other persons close to the deceased and of creditors of the succession must be effectively guaranteed.”
Until this change, if you own a home abroad, but are domiciled in the UK, succession to your foreign home was generally governed by UK law. In turn, our internal private international law rules passed the question of succession back to the country in which the property is situated; a concept known as renvoi. Domicile is a complex concept which, essentially, looks at where your permanent home is, applying a number of different factors. Domicile is important not only to succession rules but also in relation to taxation.
The effect of the most recent rules was that succession to homes on the continent could be governed by the internal rules of the country in which the property is situated, even if the owner is resident and domiciled elsewhere. In France, for example, the law determines who inherits a house on death and in what proportions; these rules cannot be overridden by the terms of a Will.
However, under the Regulation, succession to such assets will be governed by the law of the deceased’s habitual residence, unless that person has chosen to apply the law of their nationality (see below).
If that habitual residence is in an EU member state, the law of renvoi will not apply. If that habitual residence is outwith a member state, renvoi will still apply and so the question of succession might be referred back to the country in which the heritable asset is situated. One of the major uncertainties surrounding the Regulation is whether the UK (plus Ireland and Denmark) will be regarded as a member state for this purpose, given it has not signed up to the Regulation. It is likely that this issue will only be resolved following a judgement from the Court of Justice of the European Union.
If an individual has chosen to apply the law of their nationality, renvoi will not apply regardless of whether the chosen nationality is within or outwith the EU. Therefore, there is an opportunity for UK nationals to choose that the law of the UK will govern the succession to their property in certain EU countries. For someone who is Scottish, that would mean that the individual has testamentary freedom to decide who will inherit their foreign home, as the Scottish ‘forced heirship’ provisions do not currently apply to heritable property.
The Regulation implies a choice of law in certain instances where a Will is already in place.
Whilst the Regulation does not specifically affect the taxation of an estate, it will be an inevitable consequence of the new rules that tax is affected in certain circumstances.
The Regulation is complex and, as is inevitable when many different legal systems are involved, its practical effects are not yet fully understood amongst the profession and it is likely to be some years before some of the uncertainties are clarified by the Court of Justice.
However, it is essential that those who are potentially affected by the Regulation seek professional advice to ensure that any opportunities presented by the Regulation are taken and that any potentially unwanted consequences are fully understood.
• Eilidh Adams is an Associate with Gillespie Macandrew LLP www.gillespiemacandrew.co.uk