Calls to harmonise the private international law governing succession across the EU, were enthusiastically welcomed ten years ago.
When finally enacted on 17 August 2012, the rather heftily titled “Regulation (EU) 650/2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European
Certificate of Succession” (“the Regulation”) or “Brussels IV”, creates ambiguities and complications that may have implications for anyone with assets in countries within the EU where the Regulation is to apply. It will apply to the estates of people who die after 17 August 2015.
Regulations are the most direct form of EU law. They have binding legal force throughout every member state, on a par with national laws. As opposed to EU directives and court decisions, national governments do not have to take action themselves to implement EU regulations.
They can, however, opt out, and somewhat frustrating the purpose of the legislation, the UK, Denmark and Ireland have opted out. Even so, it will affect anyone with assets in states which have opted in, so called “Regulation States”, and it has the potential to override Wills and succession agreements.
The Regulation applies a single national law of succession to a person’s moveable and immoveable property upon death ad applies to both testate and intestate succession (i.e. whether or not the person made a Will). The applicable law is that of the country of the deceased’s habitual residence at the time of death, unless:
Broadly, the Regulation does not apply to lifetime gifts and says little about trusts.
This may prove awkward where the assets of a testator fall within a jurisdiction which does not fully recognise trusts and the devolution of assets under their terms, such as France.
It is important for those who could be affected by the Regulation to revisit their Wills. This is because there may be an opportunity for those who die after 17 August 2015 to avoid local forced heirship rules where these currently apply, by electing for their law of nationality.
Conversely, where local laws of an EU state allow assets to pass in accordance with a deceased’s national law, the effect of the Regulation and other private international law rules may be to impose local forced heirship rules that previously did not apply.
On 12 June 2013, the Supreme Court reversed the controversial ruling of the Court of Appeal in the family law case of Prest v Petrodel Resources Limited.
Mrs Prest sought financial relief from Mr Prest, who claimed he was £48 million in debt.
Throughout the proceedings, Mr Prest failed to adhere to court orders for financial disclosure of information and was found to be an unreliable witness.
At first instance the Judge determined that Mr Prest had ultimate control over a company structure, of which he was not formally a shareholder, having used it as his “money box”.
This finding enabled the Judge to conclude that he could make an order to transfer the companies’ properties to Mrs Prest.
The companies appealed successfully to the Court of Appeal arguing that the established legal position was that a company had a separate legal personality to its shareholders and its assets belonged to the company and not the shareholders.
It was held that, as a matter of company law, unless there had been impropriety (which was not present in this case) the company’s assets could not be used to satisfy Mr Prest’s personal obligations.
On appeal, the Supreme Court found in the wife’s favour.
They concluded that the companies’ properties were held on trust for the husband and on that basis could be transferred to the wife. To reach this decision they drew adverse inferences against the husband as he could provide no evidence or explanation to rebut the inference that he was the beneficial owner of the properties.
This was despite Mr Prest’s contentions that pursuant to an order of the High Court in Nigeria, he was prohibited from disclosing any information concerning the accounts or affairs of one of the companies, PRL Nigeria or from asserting or disclosing information showing that he was the sole owner of that company.
The Court of first instance had decided that this Nigerian order posed no genuine obstacle to Mr Prest in complying with the terms of the order for disclosure of the English Court at the time.
While on the specific facts of this case, the Supreme Court were able to find in favour of the wife, the concern is that the arguments advanced on behalf of the companies, which were based on the structure of corporate law and which were in fact upheld by the Supreme Court, will be relied upon in the future by unscrupulous spouses who try to hide assets behind a corporate structure in order to defeat their spouse’s financial claims on divorce.
However, the Supreme Court’s decision does reinforce the importance of proper disclosure; Mr Prest and his companies suffered for his non-compliance with the court orders for disclosure.
In the March 2013 Budget, the Government unexpectedly announced, without any consultation, a package of measures restricting the circumstances in which liabilities can be deducted for Inheritance Tax (“IHT”) purposes, which may in particular impact on the tax arrangements of individuals who own homes in the UK but are not domiciled here.
Non-UK domiciled individuals are generally only liable to IHT, whether on their death or on a lifetime transfer, on their UK property. Their foreign assets are excluded from the charge to IHT and are therefore “excluded property”.
Similarly foreign assets of a trust, which was set up by a non-domiciled settlor, are outside the scope of IHT trust charges regime and so are not subject to 10 yearly charges or exit charges when the property leaves the trust.
IHT is generally charged on the net value of a non-domiciliary’s UK assets after deducting all liabilities, such as debt or loans on property outstanding at the date of charge, although certain exclusions, exemptions and reliefs may also be available.
However, from 17 July 2013, there are restrictions on which debts are deductible against IHT.
Notably, no deduction will be allowed for a liability to the extent that it is attributable to financing (directly or indirectly) the acquisition of any excluded property, or the maintenance or enhancement of the value of any such property.
These restrictions will also apply to trusts with excluded property.
These changes may in particular affect non-domiciliaries who are considering taking homes worth more than £2million out of corporate ownership to avoid the recently introduced Annual Tax on Enveloped Dwellings (“ATED”) and the associated CGT charge on the disposal of such properties.
Some owners were seeking instead to borrow against the value of these UK properties to mitigate the resulting IHT exposure on their UK homes.
However, under the new rules, if funds are borrowed by a non-domiciliary to reduce the value of their UK home are deposited or invested offshore the debt will not be deductible, as the loan will be attributable to financing the acquisition of excluded property.
The full value of the UK property would therefore remain within the UK tax net.
More complex arrangements involving debt, for instance involving a trust structure, may also be affected. However, straightforward arrangements where a non-domiciliary takes out a commercial mortgage in order to purchase UK property will not – such liabilities should remain fully deductible.
In addition the deductibility of debts will also be restricted where the liability has been incurred to acquire assets on which a relief such as business property, agricultural property or woodland relief is due and on liabilities owes by the deceased at the time of death, which are not actually repaid from the estate after the death.
There are a few limitations to the new rules and HMRC Guidance provides some examples of how they may be applied in practice.
Any existing or proposed arrangement involving excluded property which also relies on the deduction of a debt should be reviewed and the purpose for which borrowings are acquired and applies will need to be examined closely.
In addition, if steps are taken to circumvent the new debt rules, it will be necessary to check those arrangements are not caught be the general anti-abuse rules which also came into force on 17 July!
This Publication provides general advice only is should not be relied upon when making decisions. Neither CST nor any other professional in the firm has prepared this with a view to covering any client scenario and this document is not a substitute for professional advice. It has been prepared in conjunction with firm of Boodle Hatfield see www.boodlehatfield.com.