Being able to leave your property to whoever you wish is regarded as an essential freedom in this country. Not necessarily so elsewhere. However, a new EU Succession Regulation, which takes effect on 17th August 2015, offers unprecedented estate planning opportunities for UK investors who own real estate in other EU countries.
Broadly speaking, when someone dies owning property in another EU country, the courts in that other EU country (with the exception of the UK, Ireland and Denmark) will be obliged to accept the succession law of the country in which the deceased owner was habitually resident as determining the way in which the property passes. Alternatively, the property owner would have had the option of stating in their Will which country’s succession law was to apply, as long as they were a national of that country. So instead of having to pass under the forced heirship laws of the country in which it is situated, the real estate could pass under the terms of a UK Will as if it were UK property.
Example:- Henry is the proud owner of a delightful mas in Provence which he purchased many years ago and has lovingly restored. He visits as often as he can with his second wife, Jenny. His three children from his first marriage (now grown-up) also stay from time to time. Until now, on Henry’s death the property would have been subject to the French legal reserve i.e. three-quarters of it going immediately to Henry’s three children with only the remaining quarter being disposable by Will i.e. available to Jenny. If the three children turned out not to be as well-disposed towards their stepmother as Henry had believed, that could make things very awkward. However, under the new regime Henry can specify in his Will that the succession law of England & Wales (E&W) is to apply (rather than trusting that his habitual residence will be deemed to be there). He could then, for instance, leave the property on life interest to Jenny with remainder to his three children, or in any other way he saw fit.
Some important points to note are:
• It will be for the person who makes the Will to make an explicit choice of succession law. (Druces have already prepared standard wording for this);
• They must be a national of the jurisdiction whose succession law they are choosing;
• If a choice is not made the property will pass according to the succession law of the country in which the owner was habitually resident. For some people, this could be a matter of dispute;
• The old E&W principle that real estate must pass under the succession law of the country in which it is situated will no longer apply;
• One succession law must apply to the whole estate. It will not be possible to ‘mix and match’ different laws to different parts of the estate;
• The new Regulation has no effect for tax purposes; it affects only which succession law applies. Issues may therefore arise where E&W trusts are used;
• There may be reluctance in some countries to accept dispositions of real estate made under UK Wills which conflict with their traditions, particularly as the UK is not a signatory to the Regulation. However, the Regulation obliges courts in all signatory countries to accept the applicable succession law, whether or not it is the law of a state which is a signatory, or even of an EU member state;
• Even if the UK were to leave the EU, UK citizens should still be able to take advantage of the Regulation. However, any benefit might be minimal as the E&W principle that real estate must pass under the succession law of the country in which it is situated could apply once more;
So any UK person who owns real estate in another EU country now has an opportunity to reconsider how they would like the property to pass on their death. Possibilities are now open which have not been open before. Not only that but anyone looking to purchase residential property in another EU country need no longer feel obliged to adopt complex ownership structures in order to circumvent local forced heirship rules.
Citizens of other EU countries who have come to the UK to live and work also need to give some thought as to how the new Regulation may affect how their property would pass on their death, particularly if they could be regarded as habitually resident here.
Example:- Anna is a German national who came to the UK to work for a bank in the City. She owns a flat in London, as well as her old apartment in Frankfurt, which she now rents out. She has not decided whether she will ever return to Germany, particularly as she intends to marry James, whom she met here, and with whom she expects to raise a family. She intends to make a Will in E&W.
Under the old regime, a great deal would have turned on the complex matter of determining Anna’s domicile. Under E&W law, if she had acquired an E&W domicile of choice, her Will would have been effective to pass all her property in E&W, both real & personal, as well as any personal property in Germany. However, the E&W principle would have applied that real estate must pass according to the law of the jurisdiction in which the real estate is situated. In Anna’s case that would have meant that German succession law would have applied to her German apartment, regardless of any dispositions in her Will.
On the other hand, if Anna had retained her German domicile of origin then all her property in both countries would have been subject to German succession law, regardless of the dispositions in her Will. Unfortunately, the position would actually have been even more complex. Under German law, Anna would have remained a German national, regardless of any residence in E&W and regardless of whether she were regarded here as having acquired an E&W domicile of choice. So all her worldwide assets would be subject to German succession law, which prescribes how her estate would be divided. This would conflict with the E&W principle that immovables (real estate) should pass according to the succession law of the jurisdiction in which they are situated i.e. that the London flat would be subject to E&W succession law, not German.
Under the new regime, the position is altered but still complicated. Firstly, if Anna were habitually resident in E&W then, as far as German law is concerned, her German nationality is no longer an issue and the estate would pass under E&W succession law, unless Anna had made a choice of German succession law in her Will (which, as a German national, she would be entitled to do). Although the UK is not a signatory to the Regulation, a German court would no longer accept the effect of the E&W principle that any real estate should pass according to the succession law of the country in which it is situated, with the result that the Frankfurt apartment could be passed under her E&W Will, in any way she saw fit. However, if Anna had chosen German law as applicable to the succession it would have to apply to the whole estate. A German court would respect that choice and issue a Succession Certificate in respect of her entire estate, including any real estate or personal property situated in E&W. How an E&W court would treat a Succession Certificate in such circumstances is, at the moment, unclear.
Finally, if Anna were concerned that, if she were to die in E&W she might be deemed to be UK domiciled and habitually resident here, she could make an E&W Will with dispositions of her property which were in accordance with German succession law and that Will would be effective in E&W. Also, being a Will executed in accordance with the succession law of her habitual residence it would be effective in Germany as well. (However, as a belt-and-braces approach, it might still be wise for her to make Wills in both countries).
Anyone who finds themselves in a similar position would do well to take advice on the specific interaction of E&W law and the law of their home country in the light of the new regulation.This note is not intended to be taken as legal advice. It is guidance only. It reflects the law as as 2 April 2015.