Oversight can wreck dream life in the sun

OVER the past decade there's been a surge in the number of Scots who own a second home abroad, and that trend seems likely to continue. According to Mintel, one in five adults in the UK dreams of buying a second home abroad.

The majority of Scottish buyers are in their late 40s and 50s, many of whom intend to retire overseas later in life. Unfortunately, many of them still overlook issues relating to wills and inheritance tax. This oversight can prove extremely costly.

In Spain, for example, inheritance tax can be as high as 81.4 per cent where the estate passes to anyone other than a close relative. In France, rates can be as high as 60 per cent, and buyers may find they can't stipulate who inherits their property. It's even possible for a property overseas to be taxed twice – in the UK and abroad.

There are three basic points for overseas property buyers to consider here: 1. If they die, is their Scottish will capable of transferring all property, wherever situated, to those they intend to inherit it? 2. Will Scottish law be applied to the winding up and division of their estate? 3. If they've already retired abroad, have they taken the prudent step of preparing a will in the country where they're now living?

A quick example: Bill and Mary, and John and Liz, are couples in their late 40s and each buys an apartment on the Costa Brava, with a view to retiring there. A few years later, both couples realise they enjoy their overseas properties so much that they decide to buy a small business there and move overseas permanently. For each couple, all that remains in Scotland financially is a bank account and some investments, which can be managed online from abroad. Ten years later, however, Bill and Liz die.

Mary remembers that she and Bill had asked their family solicitor to prepare wills many years earlier, before any plans about moving to Spain had been made. John and Liz never made a will. Mary asks her Scottish solicitor to deal with the winding up of Bill's estate, and also to deal with Liz's estate. Mary and John are also advised by friends to contact a local lawyer who can deal with the business interests, property and investments held in Spain. The Scottish solicitor asks one simple but crucial question: were Bill and Liz domiciled in Spain when they died? And with that, the nightmare begins.

A little-known fact among overseas property buyers is that upon death, the law which applies to your estate is generally the law of your "domicile" at the date of your death. Crucially, domicile in this context does not necessarily mean the country of residence. Lawyers will generally tell you that your domicile is the country with which you have "the closest connection" at the time of your death.

If you don't have a will (referred to as "dying intestate" in Scotland) and die domiciled abroad, your estate and assets there are subject to that country's law.

Matters are further complicated by most countries' laws distinguishing between "moveable" and "immoveable" property. Immoveable property tends to be land and buildings, and moveable property is everything else. If you die domiciled in one country but still own immoveable property in another, it's the law where the immoveable property is situated which will apply to it, irrespective of the owner's domicile.

So, if John and Liz had retained a small property in Scotland, the Scots law of intestacy would apply to that property, whilst the law of Spain would cover not only the immoveable and moveable property on the Costa Brava, but also the moveable property in Scotland. Fortunately, most Scots buying in Spain are advised by Spanish lawyers to make a Spanish will, but this is still not likely to cover Scottish assets.

Even if you've prepared a will in Scotland but die domiciled abroad, matters can be equally complicated. The law of the domicile still applies to the winding up of your estate. Many countries do not legally recognise a will prepared in another country, or if they do, they'll apply the law of the domicile to it nonetheless.

My advice to anyone thinking of buying property abroad is to consult reputable lawyers in both countries. Every adult should have an up-to-date will, but anyone with property abroad is likely to require a second will which takes local estate tax rules into account. At the very least, this will ensure that your assets are inherited by your intended heirs.

Also bear in mind that the longer you stay permanently in one country, the more likely you are to become domiciled there, so it's important to review your position every few years in case changes to one or both of your wills are required.

Des Coyne is head of the private client department at law firm Russel + Aitken LLP. www.russelaitken.com