Tax Traps - Succession Planning and Homes Abroad

And whilst succession planning may not be the first thing on your mind, it is worth considering what will happen to your home abroad when you are no longer around to enjoy it.

Cross-border estates are by their very nature complex, as it is necessary to take into account both the legal and taxation systems of all the jurisdictions involved and to consider where the owners of the property are domiciled.

It used to be the case that immovable assets, such as property, would, on death, automatically be subject to the succession law of the country in which the property was situated. This meant, for example, that property located in a civil law jurisdiction might be subject to the rules of forced heirship.

Since the advent of the European Succession Regulation in August 2015, however, it is possible to elect for English law to apply to assets in other European jurisdictions. However property will still be subject to tax law of the country in which it is located, although this may be mitigated by double taxation treaties.

Who Pays the Tax?

In most civil law jurisdictions it is the beneficiaries, and not the estate, who pay inheritance tax. Each category of beneficiary, such as spouse, child or non-relative, will pay tax at a specific rate, subject to an allowance. For example, in Italy both children and spouses pay inheritance tax at 4%, subject to an allowance of 1m euros.

If the entire estate is left to the surviving spouse, as is typical in an English Will, with the children only inheriting on the second death, the children's allowances may be lost on the death of the first of their parents.

Trusts

Care must be taken when trusts are involved as many civil jurisdictions do not recognise trusts.

In 2011 France introduced a measure whereby English trusts can now be taxed in France. What this means is that if there is a trust in an English Will covering property in France then it will be subject to French 'droit de succession' (the equivalent of inheritance tax). In France there is no inheritance tax between spouses and there are generous allowances for other close relatives, such as children. Trusts however are treated as non-relatives and may be taxed at the highest rate - for a discretionary trust where non-relatives may benefit this can be as high as 60%.

This is a complex area of law and it is vital to take advice from a cross-border specialist. If in any doubt it may be better to ensure that no foreign property passes into trust on death.

Lifetime Gifts

Many individuals decide to give away their holiday homes to their children, in the hope that, if they live seven years, they will avoid having to pay inheritance tax on the property in question. However if they continue to spend several weeks a year at the property they may fall foul of the "reservation of benefit rules" and the property may be brought into account when inheritance tax is calculated.

In many civil law jurisdictions it is possible to give a "usufruct" to children over a property. A usufruct is the right to use and enjoy another's property. However, whilst this can be a very sensible agreement if the testators are domiciled in the civil law jurisdiction, if they are domiciled in England and Wales for inheritance tax purposes and they continue to use the property more than very rarely, this can be a reservation of benefit and they can be taxed at the full value of the property on death.

If you would like more information about any of the points raised in this article please contact Angharad Lynn in our Private Client team on 020 7665 0904, or complete the form below.