Navigating European Inheritance Laws for Property Owners Abroad
Last summer, the European Commission introduced new rules to make inheritance laws easier for foreigners and expatriate property owners.
Basically, expats can now choose which inheritance laws they want to apply to their foreign assets — those of their own country, or those of the country where the assets are located.
Expats Choose Which Inheritance Laws to Apply to Foreign Assets
Before the change took effect on August 17, 2015, expats had to comply with the laws of whatever country the asset was owned in, which often took precedence over their own wishes regarding the disposition of that property or investment.
What You Should Know About the New Rules
How Habitual Residence Affects the Laws
There are always wrinkles, of course.
Three countries opted out of the EU succession laws: Denmark, Ireland and the UK. Citizens of those countries apply their own inheritance laws to property owned abroad. That means Danes, Irish and Brits don’t have the options open to other EU country citizens, opting out of inheritance laws due to religion, for example. On the other hand, British, Irish or Danish citizens living in other EU countries can benefit from the new EU rules.
Retiring Country vs Country of Habitual Residence
And then there’s the conundrum put out by Withers, an international law firm: “EU Member States will look primarily at your habitual residence, albeit with the ability to make an election in favour of the national law.” The problem with this is that you may think of your “habitual residence” as one place, and the law might consider it somewhere else. We’ll dive deeper into that problem in a moment.
But you have to unmistakably elect national law in your will, whether you’re trumping it with citizenship, residency or even religion, in order for your wishes to be adhered to, Withers warns.
“If you arrange your succession planning on the basis that your estate will be governed by your national law as a result of your citizenship (e.g. Germans, Italians and Spaniards), domicile (e.g. Brits and Americans) or religion (e.g. many Middle Eastern clients), you will need to consider including a clear election in your Will in order to oust the ‘habitual residence’ rule.”
As Lorna Sansom at the UK law firm of Blandy & Blandy writes, this means “that for people who live in England and Wales but have property in, say, France, the law of England and Wales will apply to their assets in France. However, if the same people were to retire to their French property (and become habitually resident in France), if they want English law to continue to apply, they would need to make a choice of English Law in their wills.”
There’s another potential problem, too, Ray Clancy points out at Expat Forum. “Some areas of the law are unclear, for example where someone lives in a second country and owns property in a third, or where a person moves country after making their will.”
All of this is to say that expats from any country who own foreign property should get professional advice when drawing up a will.
Help Explaining it all from the EU Commission
The European Commission issued a leaflet explaining the legislation, and confirming that under the new rules “courts of the EU country where the person usually lived at the time of their death will deal with the inheritance and will apply the law of that EU country. However, citizens can choose the law of their country of nationality to apply to their estate, whether it is an EU or a non-EU country.”
While the Commission confirms that civil law aspects of succession — including beneficiaries and transfer of assets — are covered by the legislation, others are not. These include matrimonial property regimes, trusts, taxes and companies.
There are summaries of succession laws for EU countries at the the European e-Justice Portal, as well as information on the rules. You can also obtain the European Certificate of Succession form and use the Find a Notary search to, well, find a notary in member states.
An EU Legislation Example
If you aren’t in the mood to comb through EU legalese, take heart. London law firm Wedlake Bell has put together a series of short videos explaining European Succession Regulation 650/2012, colloquially known as Brussels IV. Partner Camilla Wallace and solicitor Kate Johnson walk you through an introduction to the rules, give an example of a client affected and talk about the benefits to UK citizens. Johnson provides further examples in the firm’s newsletter.
And if you like examples, here’s one from The Law Society Gazette: “A woman in the UK with a property in France would have been obliged to leave it to her husband and children under French forced heirship rules. Now under the new succession rule she could instead choose to apply UK law to the property, which would allow her to leave the house to her brother instead.”
Bottom Line: It’s Good News
Peter Gosling of the UK law firm Higgs & Sons thinks the changes to succession law are good news for expats, including “more than 1,000,000 Brits having opted to make their homes in Spain.” That’s because the rules now “allow EU expats to decide whether they wish their estate to be subject to the succession rules of their country of residence or their home country.”
The succession rules are also good news for English citizens who have invested in property overseas. “You will be able to be resident in England and create an English will that stipulates that English Law is to apply to your entire worldwide estate, including your EU based property,” Gosling says. “EU member states who are signatory to the regulation will then not apply their own (and sometime draconian forced heirship) rules but apply English law.”
So, Why the Opt-Out?
Tony Mudd at UK wealth management firm St. James’s Place wrote about Brussels IV in International Advisor, where he explained why the UK opted out. It was for a number of reasons, he says, including:
- “a lack of clarity around the definition of habitual residence,
- “the role of personal representatives,
- “and concerns in relation to claw back on lifetime gifts.”
The Swiss law firm of Baer & Karrer agree that the meaning of “habitual residence” is crucial when it comes to estate planning, in their case for Swiss residents and nationals. The firm told STEP (a London-based global association for practitioners dealing with family inheritance and succession planning) that “the regulation does not define ‘last habitual residence’, but it requires to take into account the length of time spent by the deceased in various countries. Swiss law, however, defines it as the last place where the deceased was living with the intent to remain there permanently.”
Clawback provisions are present in many civil codes and EU state laws that require a “fixed portion of property to go to certain people,” writes Jason Porter for New Model Advisor. The acceptance of these provisions “affects a UK individual’s right of lifetime and testamentary disposition over their property.” In other words, if too much of the estate has been given away during the lifetime of the deceased, the reserved heirs can attempt to make a legal claim to recover those assets.
Another cause for concern to British citizens, Porter continues, pertains to French law. He writes that “under Brussels IV, UK nationals living in France can now elect for UK succession law to apply on their death to their whole estate, including assets in France, thereby avoiding French succession law. But the UK has one of its few estate tax treaties with France, and the wording of the treaty is such that if an expat opts for UK succession law, an estate may be liable to both UK inheritance tax and French succession tax, with no right of set-off.”
Roger Peters, senior partner at London law firm Gordon Dadds, says the opt-out by the UK, Ireland and Denmark means something different for foreigners. “The best advice for nationals or permanent residents of other European countries who have a house, apartment or other landed property in England and Wales remains to make an English form Will covering that property, in addition to a Will in their country of residence,” he writes.
After Death, Taxes
And the Godley tax team, also based in London, reminds UK residents with overseas property that “the new EU rules do not alter the tax rules which apply, so your executors will still face dealing with inheritance tax and its overseas equivalent.” In other words, it’s not just about what determines habitual residence or watching for forced heirship rules, but also looking out for the next generation and protecting the value of your assets for the future.
Rob Kay at The Riviera Reporter is of the opinion that French coffers will in fact benefit from Brussels IV specifically because it does not apply to inheritance taxes.
“The situation remains as before,” he explains, “where an individual has assets in more than one country, and different inheritance tax regimes apply, the double tax treaty (if any) or the national tax rules will determine where and how succession tax is paid. Therefore, if you are resident in France at the date of your death or if you have assets in France, the French succession tax rules continue to apply. You cannot choose UK inheritance tax instead of French succession tax.”
Even with the complications and potential problems, however, the consensus seems to be that, overall, the EU succession regulations have made cross-border inheritance simpler. While wealthy investors with several properties in numerous locations might not concur, it certainly is the case for the vast majority of expats who reside in one country and own a vacation home in another.