New law warning for all Canadian owners of property in the EU

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Action should be taken now to benefit from the new 2015 European inheritance rules

Many people owning (or thinking of buying) real estate in the European Union (EU) will be aware that the law of the state where the real estate is situated decides which law governs the taxation and devolution (who gets what when you die) of your EU real-estate.

Many will also be aware that the system of law practised in most EU states is Civil law and in most Civil law jurisdictions an individual’s real estate is subject to forced-heirship provisions. What this means in practice is that the legal system of the State where the property is situated decides who receives your property when you die.

Put simply, your Will is probably (at least partly) ineffective if it conflicts with forced-heirship rules.

The good news is that this is all changing in 2015 in such a way that it could advantage Canadian owners of property in the most of the EU.

I say ‘most’ of the EU because the UK, Ireland and Denmark have all opted out of the Regulation and so the Regulation does not apply to the real estate of Canadian nationals in those jurisdictions, but our international team can provide advice on the succession law in those countries if required.

As for the rest of the EU, the key piece of legislation has the ‘catchy title’ of EU regulation 650/2012, otherwise known as Brussels IV… We’ll call it the ‘Regulation’.

Under the Regulation, after 17th August 2015, any Canadian national who has property in any participating EU State (and who has taken appropriate action before their death) can choose either the law of the country of their habitual residence, or the law of their nationality to govern the devolution of their EU estate.

If they make no choice then the default position is that the succession of their estate will be governed by the State of their habitual residence, and in the case of a Canadian living or working abroad, this could be a disaster.

A Canadian living in Paris for example could be faced with their property devolving under French forced heirship law on their death, or worse still, any Canadian living in Kuwait, with real estate in Rome would be faced with their property devolving under Shari’a law on their death.

The Regulation may sound like a ‘silver bullet’ solution to the forced heirship provisions which currently thwart the ‘best laid plans’ of Canadian Will-makers, but what many people are not aware of is that the new rules will only benefit those Canadian nationals who have taken appropriate action during their lifetime.

The ‘appropriate action’ is to make a nomination in a Will which is valid in the State where the property is situated, stating which law will apply to their real estate.

This could be made in a Will made in the State where the real estate is situated or, in those EU States where Canadian Wills are valid, the nomination could be made in your Canadian Will and - here is the important bit - it can be done now in preparation for the 2015 changes.

In fact, not only can a nomination be made now, it should be made now and I would go so far as to say that if you are having a new Will drafted in the circumstances described above, by a professional person, and a properly drafted nomination had not been included, you should ask: why not?

Many may believe that they need do nothing until 2015, but this is not the case. What if, for example, the Will-maker loses the mental capacity to make a new Will between now and 17th August 2015 either as a result of a degenerative condition or an accident? What if the Will-maker adopts a ‘wait and see’ approach and then forgets to make the necessary changes?

In both of these scenarios the estate will not benefit from the new regulations which in turn could mean their overseas property may not pass to their loved ones, regardless of what it says in their Will.

The point from a Canadian perspective is that the Regulation does not restrict the choice of law to EU nationals and so, for example, a Canadian national with property in a participating EU state could nominate the law of the state with which they are most closely connected to apply to the succession of their property – say Alberta succession law; a Hong Kong national could nominate Hong Kong law; a Japanese, Japanese law, and so on.

Another potentially useful element of the Regulation is that a European Certificate of Succession (ECS) – which is the equivalent of letters testamentary - will be issued by the country of the person’s habitual residence which will be recognised in all other participating EU States. This could be useful to say, a Canadian living in France who also has property in Italy or Germany because the certificate will be recognised in all of these jurisdictions; but it probably won’t help a Canadian who is habitually resident in the UK, Denmark or Ireland (or who owns real estate in those jurisdictions) because those jurisdictions will not be able to issue an ECS.

Owners of EU property must also be mindful that any nomination made now will have no effect until August 2015, which means they need to consider what will happen if they die in the next year. Only by taking proper advice from a specialist in international succession and probate law can those people ensure that any unwanted succession consequences are mitigated.

I should mention that even after 2015 (as things stand now) a Canadian will still need to obtain an English grant of representation (or reseal a Canadian grant) to collect and distribute UK assets, and tax may also be payable on the EU property, but the ability to nominate which law applies means that the possible ‘nightmare’ unfamiliar forced heirship provisions that currently exist in many EU jurisdictions could (after 17th August 2015) be a thing of the past.

As for tax, although the new law is not intended to directly affect inheritance taxation, in practical terms it could have an impact on the amount of tax paid on your foreign property. This is because in most EU jurisdictions it is not the estate that pays the tax but rather the individual beneficiary.

Each beneficiary has their own tax rate and their own tax free allowance and so, if you change the beneficiary to one that has a higher or lower tax liability, the overall amount of tax payable will change.

For example, most EU jurisdictions have a much higher rate of tax (typically 60%) and a lower tax free allowance (typically €1,500) for unrelated beneficiaries than for close family members. By contrast children usually have the lowest tax rate (typically 20%) and the highest tax free allowance (typically €100,000)

Importantly, in many EU jurisdictions there is no spousal exemption and often the spouse’s tax rate and allowance is not generous which can mean that tax has to be paid on the matrimonial home on the first spousal death.

As for inheritance tax chargeable on the same asset in different jurisdictions, it is usually possible to reclaim at least part of the double paid tax, via a double taxation convention.

It is important to realise that not only is this new law (and so untested by the courts) the law has not been clearly drafted. Specifically it is unclear how some successions involving opt-out member states will be dealt with, if there is no express declaration in the will to have the law of the nationality of the testator apply.

Moreover it is unclear how the regulation will be interpreted and/or applied by each member State, not least of all because there is, as yet no definition of what constitutes ‘habitual residence’. There is even an indication that some member States are taking no action to incorporate the provisions into their domestic law before the August 2015 deadline.

In short, although nobody yet knows precisely how the rules will work in practice, the interpretation outlined above adheres to the consensus adopted by most specialist practitioners as well as the overriding principles that the new law is intended to follow.

The author – Daniel (Dan) Harris is  Senior Associate Lawyer working in the Bath and London offices of Stone King LLP and one of only a few cross-border specialists holding the Society of Trusts and Estates Practitioners (STEP) advanced certificate in International Succession and Planning. You can contact Dan by email or telephone (+44)1225 326761.