The Difficulties of Cross-border Estates

Comment on and describe the particular difficulties arising in cross border estates, i.e. a person dying with assets in several jurisdictions. Cross border estates have inherent difficulties that centre on the legal and fiscal consequences when the investor dies. There are varying rules in the different countries and various operations in regard to succession. Some countries devolve the entire estate on the direct heirs whilst other countries allow the succession to be determined by the authorities. In some countries there is a policy of forced heirship[1]. Further problems exist in the levying of taxes on the estate. It may be difficult to decide which jurisdiction should levy the taxes[2]. This could be crucial to the estate as the tax might be higher in some jurisdictions.

For the heir it is obviously preferable if the country operating the lowest taxation system taxes the estate, however the heirs do not have any input in this decision. Through the recognition of trusts the Hague convention has attempted to address the issues on the taxation of estates[3]. In some instances estate taxes have been avoided by the assets being placed in a trust. There have been problems when such trusts have been settled as where occasionally a gift tax charge has been levied. There have been attempts within the European Union to try to introduce some form of regulation on the rules of succession so that there are clear guidelines on the rules of succession and the issue surrounding the jurisdiction in which the inheritance is table in[4]. Under the present system some countries regard habitual residence or domicile as the deciding factor on succession rights whilst other countries base their decision on nationality. Other European states have adopted a policy of determining the estate in the terms of immovable and movable items[5]. To give an example of how this works under the present system, if an English person after retirement decided to go and live in France then French law would regard him as habitually resident in France whereas English law would regard him as domiciled in England. Any movable items would be subject to succession in both English and French law.

Once the owner of the estate dies the division of the estate becomes difficult as the movable items are governed by succession rules in 2 different countries. This can be demonstrated by the case of Barbier (C-364/01) 2003

[6] in which the European court made it clear that an inheritance of property constituted a movement of capital. In this case the court held that the Dutch authorities were in breach of Article 56 of the Convention due to the restrictions placed on the successors of the estate on the grounds of nationality. In Van Hilten-Van der Heijden (Free movement of capital) [2005] EUECJ C-513/03 (23 February 2006) the problem of cross border estates was highlighted.

The case came to the attention of the courts after the death of Mrs van Hilten-van der Heijden in November 1997. Up until the beginning of 1988 she had been resident I the Netherlands. Between 1988 and 1991 she moved first to Belgium and then to Switzerland. Her estate contained immovable property in the Netherlands, Belgium and Switzerland as well as investments in securities in the Netherlands, Germany, Switzerland and the USA. Bank accounts were also discovered in the Netherlands and Belgium. The heirs of the estate where taxed under Swiss inheritance tax laws, Article 3(1) of the SW 1956, which was upheld by the Inspector following an appeal by four of the heirs. The heirs brought a further action against the inheritance tax in the European Court of Justice.

This court held that Article 3(1) of the SW 1956 is a national measure which effectively restricts the free movement of capital[7]. They found that this was a direct breach of Article 73b of the convention (now Article 53). The decision of the ECJ was that the inheritance tax had been wrongly imposed. It was also decided by this court that Directive 88/361 Annex I XI clearly covered inheritance of property within Member States with regard to the free movement of capital and should be adhered to. A simplification on the rules of inheritance where there are cross border estates ahs been attempted by the EU[8]. In a report to the EU Directorate – General for Justice in Home Affairs in 2002 the conflict of law relating to wills and succession was studied[9]. Several recommendations emerged from this report, one of which was that the last habitual residence of the deceased should be the deciding factor in determining the jurisdiction for the wills and succession[10]. Other recommendations centred on the taxation of the estate and recommended that the jurisdiction on such taxes should apply to movable and immovable items belonging to the deceased and should be made with reference to the last habitual residence. The report also proffered the suggestion that a testator should be able to designate whether he wishes the law of his nationality or the law of his habitual residence to apply to his whole estate[11]. The report believes this might be achieved by having a uniform European Certificate of Inheritance and a Central Wills Register. It is anticipated that these changes might well be implemented by 2007 following the green paper review issued by the Directorate General for Justice and Home Affairs of the EU Commission in 2005[12]. At present different countries have varying interpretations of residence and of deciding on domicile issues[13]. A review paper issued by the Inland Revenue in 2003 addressed this issue and attempted to simplify residence and domicile problems. The report compared the rules on residence and domicile in the UK with other countries around the world. The findings of the report showed that in most countries residence is viewed as where the person habitually lives[14]. All countries viewed the taxation on residence to encompass all worldwide income as taxable. Where the person is domiciled in one country but resident in this can cause distinct problems.

There is a possibility that a double taxation of their assets could occur[15]. The double taxation issue has been addressed in some countries by the use of treaties with other countries[16]. Treaties exist between the Republic of Ireland and the UK as of 1978[17]. This was aimed at preventing taxation of properties in both jurisdictions upon the owner’s death. Other treaties with other countries exist for the same purpose[18]. The basic format for the treaties is that inheritance tax is charged in the country in which the property is located[19]. Without the treaties the country of domicile would also be entitled to charge inheritance tax on the asset. Using the treaties the country of domicile gives a credit to the beneficiaries for the tax that has already been paid. Where the deceased’s assets are in a country with no such treaty the country concerned may apply a form of unilateral relief.

This is however a discretionary power and need not be adhered to. Legislation in most countries attempts to provide some form of protection to provide for the dependents of the deceased, although problems still arise with cross border estates that can lead to the dependents paying higher inheritance tax than they would have paid had the taxation been applied to the habitual residence rather than the country of domicile. A further complication can arise as the dependents might find that they do not have an automatic right to inherit and might have to apply to the court to secure their inheritance. In many civil law countries the principle of forced heirship ensures that enforceable fixed shares are given to certain categories of beneficiaries. The Inheritance (Provision for Family and Dependents) Act 1975 section 1(1) in the UK only protects the family of the deceased if the deceased dies domiciled in England or Wales. Once the recommendations of the green paper[20] come into force the Act will be reformed and will allow dependents of the deceased to claim against the estate regardless of any impact of the deceased not being domiciled in the UK at the time of their death[21]. There is a distinction in the UK between administration and the estate[22]. In the UK an estate can be vested in personal representatives who are allowed to charge for their services. These representatives are tasked to collect together all the assets, pay any debts and distribute the remainder to the beneficiaries. This distinction does not exist I civil law countries. Within civil law countries assets are automatically transferred to the heirs.

The difficulty faced by the executors appointed in the UK is that they may have difficulty proving any title to the assets as they are not recognised by other countries[23]. The rules of forced heirship in civil law countries can mean that up to three quarters of the deceased’s estate can be given to reserved heirs despite the content of the testator’s will. With someone of UK origin who is habitually resident in another country where the rules of forced heirship apply the beneficiaries in the UK might not receive their full entitlement under the terms of the will. When looking at immovable items these generally come under the jurisdiction of the country in which they are held and as such are subject to the rules of taxation and succession applicable in that country. Disposal of overseas assets can be complex and the right to administer the estate might involve adhering to certain protocol of the country in which the assets are held. It is usual for a solicitor to handle such matters though a successor to the estate can opt not to if they wish. The first thing that is needed to deal with overseas property is a Grant of Representation from the Probate office[24]. This grant allows the personal representative to deal with the deceased’s assets and administer the estate. A separate grant will be required for each country in which assets are held. If it is necessary to prove the will, then the first grant to be applied for should be the domiciled country of the deceased.

Within the grant of representation there is a grant of Probate and a Grant of Letters of Administration. The Grant of probate gives the executors the authority to gather the assets and distribute them in accordance with the will. If there is no will, then a Grant of Letters of Administration has to be obtained by the persons entitled to inherit[25]. The rules of intestacy applicable to the country of domicile of the deceased will also apply if there is no will[26]. If there is a will and that will have been contested then the country of domicile will have jurisdiction over settling the issues. Inheritance tax can be avoided in the UK by placing the property in a trust for the beneficiaries. This would make the property settled property but could only be excluded from inheritance tax if the person placing the property into trust was domiciled outside the UK when the settlement was made. UK law allows a person to change their domicile by choice[27]. This can be achieved by them changing their residence to a different place from their domicile at birth and can show that there is a clear and fixed intention to make this residence their permanent home. Evidence of this intention can be adduced from certain actions of the party concerned such as the purchase of a property in that country or the purchase of a burial plot[28]. When looking for the intention of the party concerned the immigration department will look for such evidence and may be swayed by a statutory declaration of that party in respect of their intention to remain domiciled in the new country. It is the responsibility of the person changing their domicile by choice to prove that this is their intention.

The proof required is not the balance of probabilities test but that of proof beyond reasonable doubt. If this cannot be proved then the country of domicile would revert to the domicile of origin. If spouses are both domiciled in the UK then the transfer of capital between them during their lifetime is exempt from inheritance tax. Where the person transferring the assets is domiciled in the UK but the spouse is domiciled elsewhere then any capital transferred may be subject to inheritance tax. If the transferor is domiciled outside the UK and the spouse is domiciled in the UK then there might be a full exemption to inheritance tax. Further difficulties could arise with cross border estates if the deceased had become insolvent before his death[29]. The Insolvency Act 1986 s336 entitles the spouse of the bankrupt to the matrimonial home irrespective of her spouse’s bankruptcy. This ruling only applies under UK law which means that the rules of bankruptcy in other countries could leave the spouse without a home as the whole estate might be subject to possession by the creditors. Some countries do not recognise the rights of the spouse to the matrimonial home[30]. Where the marital property is not in the country of domicile the rights of the spouse might not be recognised automatically which could mean that the spouse could find herself without a home if the deceased is insolvent. Assets that are bought and sold in other countries can cause difficulties in the administration of cross border estates. In the UK tax is levied on property or assets held in a foreign country once those items are sold and the money reinvested back in the UK. Some people have been able to avoid the UK taxation system when buying property in other countries although very few are successful at doing this. The conclusion that can be drawn from the above is that cross border estates can cause an assortment of problems for the relatives of the deceased. The largest problem is in collecting all the assets of the estate together and in deciding which country will have jurisdiction for the collection of inheritance tax[31]. The difficulty with immovable and movable objects can cause further problems as some parts of the estate will be subject to inheritance tax in one jurisdiction whilst other items might be taxed in a different jurisdiction. Immovable items are always taxed in the country of origin which means that anyone considering buying an overseas property should look at the inheritance tax rules of that country before buying the property.

Movable items are generally taxed according to the persons domicile or habitual residence[32]. There can be some instances where two countries can claim jurisdiction over the movable item. In these circumstances the court must decide which country should have jurisdiction. In assessing the assets of the deceased most countries adopt the principle of habitual residence, however in the UK the taxation rights are recognised with regard to the domicile of the deceased. As mentioned above the UK allows citizens to change their domicile of choice the effect of which would be that if the person were originally domiciled in the UK but adopted another country as his domicile of choice all the assets of his estate would be subject to the taxation laws of the newly domiciled country irrespective of any movable items that might still be held by the deceased in the UK. Spouses generally only obtain an automatic right to possession of the marital home if they are both domiciled within the UK or if the property was placed in trust for the spouse by the transferor whilst domiciled out of the UK. There is no unilateral recognition of wills in other countries and this can cause difficulties for executors who might not be recognised by other countries as having any title to the deceased’s assets. The further difficulty with wills not being recognised unilaterally as mentioned above could mean that the wishes of the testator might not be adhered to and heirs the testator did not wish to receive anything from the estate might receive the bulk of the estate[33]. Bibliography Hayton, DJ, The Law of Trusts and Equitable Remedies, 11th Ed, 2001, Sweet and Maxwell Sornarajah, M., The International Law on Foreign Investment, Cambridge: Cambridge University Press (1994) Bridge, M & Stevens, R, Cross-border Security & Insolvency, 2001, Oxford University Press Ross, S Inheritance Act Claims: Law and Practice,2005 Sweet & Maxwell Organizations, Reorganizations, Amalgamations, Divisions and Dissolutions: Cross-Border Assets, Double Taxation and Potential Relief Under the U.S. – Canada Tax Treaty”, Georgia Journal of International and Comparative Law, v. 26 No. 2, 1997, with Professor C. Manolakas. Green Paper – Succession and wills {SEC(2005) 270} https://ec.europa.eu/justice_home/doc_centre/civil/studies/doc/testaments_successions_summary_en.pdf https://ec.europa.eu/justice_home/doc_centre/immigration/work/doc/com_2004_811_en.pdf https://ec.europa.eu/justice_home/news/consulting_public/successions/contributions/contribution_ls_appa_en.pdf https://eur-lex.europa.eu https://europa.en.int/comm/justice_home/doc_centre/civi/doc/com_205_065_en https://www.canter-law.co.uk https://www.gov.uk https://www.europarl.europa.eu/hearings/20051121/juri/frimston_en.pdf https://www.eurunion.org https://www.friendsprovident.co.uk https://www.hmrc.gov.uk https://www.hm-treasury.gov.uk https://www.icaew.com https://www.lawgram.com https://www.morganmcmanus.com https://www.murraybeith.co.uk https://publications.parliament.uk/ https://swarb.co.uk https://www.taxireland.ie/documents/uk_agreement.pdf https://www.taxjustice.net https://www.thursfields.com https://www.ukvisas.gov.uk Table of Cases Barbier (Free movement of capital) [2003] EUECJ C-364/01 (11 December 2003) McMahon & Ors v McGrath & Ors [2005] EWHC 2125 (Ch) (07 October 2005); HIH Casualty & General Insurance Ltd & Ors v McMahon & Ors [2006] EWCA Civ 732 (09 June 2006) Ospelt and Schlossle Weissenberg Familienstiftung (Free movement of capital) [2003] EUECJ C-452/01 (23 September 2003) Van Hilten-Van der Heijden (Free movement of capital) [2005] EUECJ C-513/03 (23 February 2006) Table of Statute Inheritance (Provision for Family and Dependents) Act 1975 European Communities (Personal Insolvency) Regulations S.I. No. 334/2002; 1

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[1] https://www.itpa.org/open/summaries/copen92s.html#b

[2] https://www.murraybeith.co.uk/pages/news_article.php?id=13

23] https://www.lawgram.com/resources/publications/MEuropeanEstateAdministrationLU.pdf

[4] https://www.eurunion.org/partner/summit/Summit9805/invest.htm

21] https://www.thursfields.com/PDF_Files/3 Cross Border Estates.pdf

[6] Barbier (Free movement of capital) [2003] EUECJ C-364/01 (11 December 2003)

[7] Ospelt and Schlossle Weissenberg Familienstiftung (Free movement of capital) [2003] EUECJ C-452/01 (23 September 2003) [8]https://ec.europa.eu/justice_home/doc_centre/civil/studies/doc/testaments_successions_summary_en.pdf [9]https://ec.europa.eu/justice_home/news/consulting_public/successions/contributions/contribution_ls_appa_en.pdf [10] https://europa.en.int/comm/justice_home/doc_centre/civi/doc/com_205_065_en [11] https://www.europarl.europa.eu/hearings/20051121/juri/frimston_en.pdf [12] Green Paper – Succession and wills {SEC(2005) 270} [13] https://www.thursfields.com/PDF_Files/3 Cross Border Estates.pdf [14] https://www.taxjustice.net/cms/upload/pdf/e_0803.pdf; https://www.hm-treasury.gov.uk/media/A37/8B/adres273kb03.pdf [15] https://www.morganmcmanus.com/html/pdf/CrossBorder_Estates.pdf [16] https://www.icaew.co.uk/librarylinks/index.cfm?AUB=TB2I_25798 [17] https://www.taxireland.ie/documents/uk_agreement.pdf [18] US/UK Double taxation convention signed July 2002 Article 22; https://www.hmrc.gov.uk/international/usa.pdf [19] https://www.hmrc.gov.uk/cto/glossary.htm [20] https://ec.europa.eu/justice_home/doc_centre/immigration/work/doc/com_2004_811_en.pdf; https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52005DC0065:EN:NOT [21] https://www.thursfields.com/PDF_Files/3 Cross Border Estates.pdf [22] https://www.lawgram.com/resources/publications/MEuropeanEstateAdministrationLU.pdf [23] https://www.lawgram.com/resources/publications/MEuropeanEstateAdministrationLU.pdf [24] https://www.morganmcmanus.com/html/pdf/CrossBorder_Estates.pdf [25] https://www.canter-law.co.uk/private_client/grant.html [26] https://www.morganmcmanus.com/html/pdf/CrossBorder_Estates.pdf [27] https://www.friendsprovident.co.uk/doclib/ctst8.pdf [28]https://www.ukvisas.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPage&c=Page&cid=1038489160281 [29] McMahon & Ors v McGrath & Ors [2005] EWHC 2125 (Ch) (07 October 2005); HIH Casualty & General Insurance Ltd & Ors v McMahon & Ors [2006] EWCA Civ 732 (09 June 2006) [30] European Communities (Personal Insolvency) Regulations S.I. No. 334/2002; https://www.publications.parliament.uk/pa/ld199900/ldhansrd/vo000615/text/00615-34.htm [31]https://www.direct.gov.uk [32] https://www.friendsprovident.co.uk/doclib/ctst8.pdf [33] https://www.swarb.co.uk/lisc/WilPr19981998.php

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