Andy Kirby looks at how the EU's Green Paper on succession and wills and assesses how it could affect the way advisers work with clients owning offshore assets
We, in the EU have never been so mobile. We can now live and work in any EU state benefiting from each country's healthcare, education and social services. With access to all of this, it is no wonder that the EU is trying to provide some standardisation across a wide number of areas. One such area, which has largely gone unnoticed thus far, is a Green Paper on succession and wills.
Although far from being agreed upon, the implications need consideration now because illiquid assets such as businesses, residential and commercial property can take many months - and possibly years - to change in terms of how they might fail to be dealt with.
In March 2005, the European Commission published a Green Paper on succession and wills, proposing to change the structure of inheritance laws radically within the EU. The 11-page document has been dubbed controversial by the UK government and its impact could affect over 2.3 million British expats living in the EU - but why?
Common and civil law
Currently, only England, Wales, Northern Ireland, Eire and Cyprus have common law jurisdictions in the EU, while other countries including Scotland, have civil law authority.
In context for those unfamiliar with the legal spiel, common law means people are given the right to 'testamentary freedom'. In other words, one can leave any proportion of their estate, to whoever they choose - such as in the case of Golda Bechal, who left her £10 million fortune to the owners of her favourite Chinese restaurant.
This is not the case in other EU countries - instead, civil law enforces 'forced heirship'. A case in point is Belgium, where children and the spouse of the deceased automatically become heirs of a minimum fixed share, even with a will.
It is not difficult to see the potential problems here. If an individual dies domiciled and resident outside the UK and leaves immovable property in either country - then exactly which laws do you apply? At present, laws in differing countries can fail to agree as to which rules apply, severely delaying the entire process.
The Green Paper consequently aims to provide clarity, possibly leading to new EU regulations that govern how such conflicts of law are resolved. The initiative will also need to deal with both testate and intestate succession - or in other words, having (or not having) a valid will.
However, with the proposals from the paper looming, the 330,000 UK pensioners living abroad may need to revisit their will arrangements in due course. Any changes to the existing legislation, if passed, potentially affect any wills with international dimensions making them invalid.
Furthermore, for those Brits living abroad who think that they're taking advantage of the inheritance tax (IHT) laws of their residing country, this is far from the case. It remains a common misconception but, no matter where you are in the world, provided that you are regarded as UK domiciled, you are subject to UK IHT laws on your worldwide assets.
Although the paper does not directly handle the issue of tax, there are also secondary implications. Since the proposals inevitably affect the rights of beneficiaries, this will affect the amount of inheritance tax.
However, with the proposed harmonisation of rules over the issues of inheritance, it has simply created another obstacle on this front.
The current position is that a draft regulation has just been made after the government's European commission took in to consideration the comments made.
The official proposal is expected to be submitted by the government in March 2009, although much of the work should have been completed by Christmas this year. The current sentiment is that it is possible that the UK may opt out of this. This would mean that UK citizens who reside in the UK and only own UK property would not be affected.
However, the multitude of UK nationals who are classed as habitually residing abroad or holding assets and property abroad will still be affected by any EU succession regulation.
Considering that the proposals are rapidly moving through the legal timeframe, now is an important time to begin thinking about the implications.
- Are there currently offspring who are deliberately excluded from the estate to any degree and who are likely to have rights under any harmonisation of forced heirship rules? If so, is there any action which could be taken at an early stage to side step the effect of any such changes?
- Some individuals will have structured their arrangements to categorise immovable assets as movable. These include assets such as land and property.
If you are an adviser what should you do? In the short term you don't want to panic any clients.
However, it would be appropriate to carry out an audit of what assets your client has, where they are domiciled and how their current wills and trusts will operate under current rules. This will make it easier to target and assess the impact of any proposed changes for clients once they become public.
We would advise wealth management lawyers to monitor the progress of the consultation carefully so as to be able to respond swiftly in restructuring arrangements, where possible, should it look like the Green Paper is likely to be enforced by the EU, either wholly or in part.
One area that advisers may like to consider immediately, especially if they have elderly clients, is the impact on their IHT bill from properties abroad. It is estimated that around 260,000 people own homes abroad. Many will have the whole of their combined IHT limit (£624,000 for a married couple), wiped out by their primary UK home and their second property will, therefore, be hit by 40% IHT.
However, their liability could be eradicated and fall outside of the proposed EU changes if they gave their home to their beneficiaries now, by way of a trust, and paid the commercial rent to use it. Subject to living for seven years, the whole of the IHT is saved. The only tax that could be paid is income tax by the beneficiaries on the rent paid for the time that the property is occupied. It is also worth noting that many people who own second homes only use them for a few weeks or months a year and, therefore, the rent is minimal. A further point is that all expenses can be offset as with any normal commercial property thus further reducing the income tax liability.
For example, assuming a £300,000 property the IHT bill is £120,000 - however, if it were rented for three months per year, at 5% rental income, the income tax bill after 10 years would be just £15,000 assuming it was paid by a higher rate tax payer - a saving of £105,000. If the beneficiaries were non tax payers the saving would be £120,000.
In conclusion, if you have clients with offshore assets there are areas that can be tackled now, and others that need to be monitored.
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