With travel restrictions lifting, Britons are once again free to research and buy a home in the southern European sun. But when the homeowner dies, who inherits the property and other assets and what estate taxes might be due?
In the UK, a simple Will suffices to set out who inherits the estate. But it may not be as easy as that when it comes to Europe, writes Jason Porter, director at Blevins Franks.
The UK’s legal system is based upon common law, while most European states have a civil law legal structure. Common law relies upon case law – published judicial interpretations of the law. Civil law, on the other hand, is founded on codified statute.
Over time this has resulted in these two systems diverging quite significantly, and one area the differences are particularly marked is to whom a deceased’s estate may be passed.
This can generate significant challenges when trying to formulate a sound estate plan for a person who might live in and own property in two or more jurisdictions with different legal systems.
This has added relevance when you are looking at someone from the UK – or in this case, England, Wales, Scotland and Northern Ireland to be precise – where the concept of domicile means these countries keep a succession law and UK inheritance tax grip on the individual, almost regardless of how long they may have been living overseas.
Divergences
A particular area of estate planning where the common law-civil law differences are highlighted is the conflict between the freedom to dispose of assets, or ‘testamentary freedom’ seen in the UK, compared to the forced heirship existing in much of Europe.
The majority of civil law succession rules allow a person’s estate to be divided into the ‘indefeasible’ (the forced heirship portion) and the ‘discretionary’ (eligible for estate planning portion).
Forced heirship regimes designate heirs in an order of priority, with many of those in Europe often placing children ahead of the spouse.
Three favourite destinations of British buyers – France, Spain and Portugal – have different variations of forced heirship. In France, one child would automatically inherit 50% of the estate, two would get 67%, while three or more get 75%.
A surviving spouse is entitled to a minimum of 25% of the deceased’s estate, but it remains possible to disinherit them from this share.
Regional differences
A Spanish estate is divided into three equal portions. The first must be distributed to the children equally, the second goes again to the children but may be unequally divided up and only the final portion can be bequeathed to the spouse.
In Portugal, if there are no children, the spouse is guaranteed 50%, but on the other hand, if more than three children inherit, the spouse’s share falls to 10% – though the remainder of the estate can be passed via the Will.
Spain and Portugal have always allowed a degree of flexibility when it comes to other nationalities. English succession law would apply to a Spanish estate – and therefore forced heirship would be set aside – where the deceased dies a British national owning UK real estate at the time of death.
In Portugal, Articles 62 and 31, no.1, of the Portuguese Civil Code, says the succession law of the nationality of the individual at the date of death applies, again setting aside forced heirship where applicable.
EU to the rescue
Some sanity arrived in 2015 in the form of EU Regulation 650/2012, otherwise known as the European Succession Regulation.
For those EU countries that signed up – all EU states excluding the UK, Denmark and Ireland – it offers residents a choice of the succession law of their country of habitual residence – though not defined, this is generally the long-term home – or electing for the succession law of their nationality to apply to all of their assets, including real estate held within a different EU country.
While the UK decided not to invoke these regulations at the time and has left the EU since, they remain relevant for UK nationals living in the EU, or those living in the UK with real estate in the EU.
But crucially, while these laws enable a UK national to bypass forced heirship, they do not change the tax position on death – the estate tax liability in an EU jurisdiction will not be determined by the UK’s allowances and flat 40% inheritance tax rate, but will be based upon that state’s allowances, exemptions and estate tax rate bands.
This is where a UK buyer of a European holiday home, or a UK national living in the EU needs to be particularly careful.
Different rates for different beneficiaries
While in the UK inheritance tax is charged on the gross estate, with subsequent distribution of the net assets to beneficiaries, most civil law jurisdictions deliver the estate to the rightful beneficiaries first, and they then pay the estate taxes on the gross value of their share.
The closer the relationship of the beneficiary to the deceased (ie children), the larger the allowance or ‘nil-rate band’ they receive and the lower the tax rates that are applied to their inheritance. ‘Distant’ or unrelated beneficiaries to the deceased will only benefit from minimal or zero allowances and will hit the highest rates of estate taxes quickest.
So, testamentary freedom can be costly – up to 60% in France and 82% in Spain in some extreme cases. In particular, two situations can catch out the uninformed – un-adopted children and an unmarried spouse (in certain jurisdictions) can fall into these higher rates, where this has not been planned for.
In addition, certain elements in the French legislature considered that EU rules, which force the French authorities to apply the succession laws of another jurisdiction, were too far-reaching, allowing them to circumvent French rules that guarantee a portion of the estate to the deceased’s children.
As a result, in November 2021, French succession law was amended to allow EU resident heirs of a deceased French person to enforce their heirship rights by claiming against any assets of the estate located in France. This clash with EU law has already ended up at the doors of the European Court of Justice – though resolution could be 10-12 years away.
In short, the estate taxes consequences of buying a home abroad and alternative means of ownership or clauses should always be considered, even if there is no intention to live there. A Will, even specifically to cover a holiday home abroad is almost always advised. This applies even more so where the individual or family relocate to the same jurisdiction.
If there is a wish to bequeath assets to nieces and nephews or friends and acquaintances, then the estate tax consequences of doing so must be understood and estate planning should be introduced to minimise the estate’s exposure.
This article was written for International Adviser by Jason Porter, director of specialist expat financial planning firm Blevins Franks and head of its European Emigration Advisory Service.
