Foreign property: post-death pitfalls

One of the things that I have most enjoyed about my seat in the firm’s private client practice group is the wide variety of work that we do.  During my seat, I have prepared Wills and Lasting Powers of Attorney for clients, made deputyship applications on behalf of clients who have lost capacity and assisted with the creation and administration of family trusts. 

In addition, the firm frequently advises executors that are dealing with a relative’s estate and can also act as executor itself when relatives are unable to undertake what can be an onerous responsibility. Recently I have been assisting in the administration of the estate of a Polish man, who I will call “Mark”.

Mark had lived in this country for many years, but still had property in Poland. 

“Foreign property is something we come across surprisingly regularly when dealing with estates.”

This is sometimes because the deceased previously lived in another country, or sometimes because the deceased owned a holiday home in, say, France or Spain.  

Many of the principles governing the succession of European property have changed recently as a result of the European Succession Regulation, which came into force on 17 August 2015.

The UK, Ireland and Denmark have not signed up to the Regulation but all other EU countries (including Poland) have and so it will affect English testators with property in Europe.  The Regulations do not apply to Mark’s estate (he died in May 2015), but I will nevertheless discuss the likely impact of the regulations in the future.

Mark’s Polish property threw up three particular legal issues that we had to consider. 

“First, was Mark’s English Will valid in Poland?"  

Mark had one English Will, which dealt with both his English and his Polish property.  Fortunately, the answer was yes; Polish law accepts a Will that is validly made in England.  The position would be the same if the European Succession Regulation applied, as the Regulation states that a Will is valid as long as it is valid in the country where it was made.

If the country where the property is located is outside of the EU, it will often be more sensible to have a second Will to cover the foreign property, to ensure that the Will complies with local requirements.  Even if the property is in the EU, it will often be easier to have a foreign Will.  A local official in Spain or Poland may not have encountered an English Will before, which may make dealing with and selling the foreign property more difficult.

“Second, did English or Polish succession law apply?” 

While in England a testator can (within limits) leave his property to whoever he chooses, this is not the case in some other countries.  For example in France, a testator is obliged to leave a certain proportion of his property to each of his children and to his spouse- regardless of whether the testator was English and lived in England.If the property is subject to French succession law, it must be left to spouse and children in the appropriate proportions.

Under English law, the usual position is that real property (generally land and buildings) passes under the succession laws of the country in which it is located.  As a result, Mark’s property in Poland will pass under Polish law. 

Matters would have been more complicated if Mark had died on or after 17 August 2015.  In contrast to the English law default position, under the European Succession Regulation (which binds Poland), property generally passes under the succession law of the country in which the deceased was habitually resident (in this case, England).  However, despite the apparent incompatibility between English and Polish law, the European Succession Regulation is likely to allow England to shift responsibility back to Poland, so that Polish succession law would still apply to the property.

“Third, did the estate have to pay inheritance tax on the Polish property?”

In the UK, inheritance tax does not depend on the location of the property, but on the domicile of the deceased.  As Mark had lived in the UK for more than 17 of the past 20 tax years he was deemed to be domiciled in the UK for inheritance tax purposes.  As a result, the starting point was that his estate would pay inheritance tax on all of his assets, even the Polish property. 

In practice, double-taxation can often be avoided as the UK has treaties with a number of other countries (for example, the US, Ireland and France) to avoid being charged inheritance tax twice on the same assets.  Unfortunately, the UK does not have such a treaty with Poland.  In these circumstances, HMRC usually allows the executors to deduct a “credit” from the inheritance tax due on foreign property, equal to the tax due on the assets in the foreign country.

However, (predictably) the position is more complicated if Polish assets are involved.  This is because in Poland the person inheriting the assets (rather than the estate) is liable for any inheritance tax due and so the process of applying for a rebate from HMRC is more complex.

“My experience dealing with Mark’s estate highlighted the importance of planning in advance.”  

It is important for clients who own foreign property to think about the implications after their death.  While nobody likes to consider their own mortality, many problems which crop up after death can be avoided by simple planning beforehand.

Posted by Elisabeth Kynaston, trainee in the private client practice group.

Elisabeth Kynaston started her training contract with B P Collins in February 2014, having previously worked at a legal publishing company and a legal advice centre in East London. She graduated from Durham University with a first class honours degree in Ancient, Medieval and Modern History. Elisabeth has completed the Graduate Diploma in Law and Legal Practice Course at the University of Law, Bloomsbury, both with distinction.

Deeds of Variation – a taxing issue

A quick glance at the daily newspapers and tuning in to radio call-ins and it is clear that the upcoming events in May are grabbing the media's attention. People are expressing their opinions as to who they think will win and who the big losers will be; how money could be better spent and whether current leaders should be replaced come the end of May. With not only the Premier League looking like it will culminate in another epic battle, but the FA Cup Final also taking place (which deserves a mention if only for my beloved Reading being within touching distance of gracing the occasion with their presence), May is on a lot of people's minds.

But moving away from issues in the sporting world, there is an even more significant event happening this May – even more important than the ten-strong B P Collins team tackling the London West Tough Mudder event, which is taking place in the name of supporting the mental health charity Mind. Yes, I am of course referring to the general election taking place on May 7, when millions of people will mark their ballot papers to vote for who they want to represent their constituency in Parliament.

In the run up to this, the Chancellor’s annual Budget was announced recently, whereby George Osborne set out the Government's intended spending plans.

Here in the private client practice, I was delegated the task of being on 'Budget Watch' to identify any news which would affect our working practices and the advice that we provide to clients, so that it could be posted on to our various social media channels for clients to be kept informed.

Amongst the introduction of the Personal Savings Allowance (which allows the first £1,000 interest an individual receives from their savings in a tax year to be tax free) and the Help to Buy ISAs for first-time buyers, the issue announced by the Chancellor of the Exchequer which caught our attention was that the use of Deeds of Variation is to be reviewed, and a report to be completed by the Autumn.

Whether this is just a political ploy used to undermine Labour leader Ed Miliband – as he and his brother David were alleged to have used a Deed of Variation with their mother Marion to vary the terms of their father’s will, so as to move ownership of a proportion of the family home into Ed and David's names – or not, will come to light in due course.

Tax avoidance has been a topic which the media have devoted many column inches to over the last few years, no less so than throughout the recent scandal involving HSBC. The announcement in the Budget to review Deeds of Variation may be a technique used by the Government to show the public that they are serious about tackling tax avoidance and that these instruments are one means for the wealthy to avoid tax.

Nevertheless, it should be remembered that these are useful documents which can help families re-distribute an estate so that it is as tax efficient as possible. 

In my first month in the practice group, I was asked to draft a Deed of Variation for an elderly client who was receiving an inheritance from their sibling, but as they had a sizeable estate already, they wanted to vary the sibling's will so that the inheritance was divided equally between their four children instead. This was opposed to the client gifting the money to the children directly; as such gifts are classified as 'Potentially Exempt Transfers' or 'PETs', and are included in an individual's death estate if made less than seven years before death. As inheritance tax was payable on the sibling's estate anyway, the use of the Deed of Variation meant that double taxation was avoided.

There are of course strict requirements that the Deeds of Variation must comply with in order to be held valid. Firstly, they must be created within two years of the death of the relevant person; it must be in writing and be signed by all of the beneficiaries who are wishing to divert their inheritance.

There are a number of situations in which it is useful to consider having a Deed of Variation, including where an individual has been omitted from the deceased's Will, or their inheritance is not seen as adequate based on the value of the deceased's estate.

A Deed of Variation can also be used to reduce the rate of inheritance tax that applies against an estate by varying the Will so as to give 10% of the deceased's net estate to charity, which qualifies the estate for the 36% rate of tax as opposed to the 40% rate. Money going to a charity registered in the EU from a deceased's estate does not attract inheritance tax as they enjoy 'charity exemption'. Of course this will not be beneficial to all estates and therefore professional advice should be taken by the executors and beneficiaries.

If you have any queries regarding Deeds of Variation, or other issues regarding estate administration, or you wish to discuss estate planning measures that you can take in order to minimise the inheritance tax that your estate will incur, then please contact a member of our private client team.

So as May draws ever closer, all preparations and discussions become increasingly more heated and intense, both in and between the political parties ahead of the election, but also for the B P Collins' Tough Mudder team, with team members frantically preparing their training regimes. I know that, for me, my labrador Bertie is starting to lose his patience with my exercise regime infringing on his walks which have been replaced with runs, as he is perennially unable to pace himself and so ends up exhausted after 200 metres. Let's just hope that the political party leaders all pace themselves for the general election better than Bertie does.

Posted by Thomas Bird, trainee in the private client practice group.

Thomas Bird started his training contract with B P Collins in September 2013. He graduated with a first class honours in International Business in 2010 before completing a Masters in Law at the University of Sheffield, attaining a commendation. Thomas worked as a paralegal within the Litigation and Dispute Resolution team for 3 months in 2012 and also gained legal experience at a well-respected firm in Leeds in 2011.

The damaging consequences of receiving poor legal advice

Coming to terms with the fact that one day you may not be able to support your loved ones is tough, so it pays to take a recommended professional's opinion. Despite being only four weeks into my training contract I have already witnessed the damaging consequences of receiving poor legal advice, often from unregulated parties.  New clients have contacted the Private Clientpractice group requesting further assistance on trusts they have already created based on the advice of others.  One particular Will and Trust writer has been the source of many people's misery and what makes this particular circumstance so deplorable is their professional looking website and specialist TV advertising, enticing the public to use their services.     

One of the most shocking examples of this is a recent case which I have been assisting in, that relates to a couple who set up three trusts, the first involving their family home and the others a rental property they jointly own.

Like many others, this couple were hoping to prevent their children being faced with high inheritance tax charges upon their death. Unfortunately the trust writer failed to provide them with any information on the tax implications that would arise in creating the trusts.

With the help of this  trust advisor, the couple transferred the family home into an ‘interest in possession’ trust, with the couple holding the life interest in the property, meaning despite not being the legal owners they were free to live in the property for the rest of their lives. The rental property was transferred into two discretionary trusts, which mirrored each other, meaning the value of the property  was effectively removed from their estates.

However, the couple had not been informed that all lifetime transfers into relevant property trusts are immediately subjected to inheritance tax, meaning that the family home, which was valued at £380,000 and the rental property, valued at £300,000, were subject to inheritance tax payable on both transfers. Thankfully for the couple their combined nil rate bands were available and equated to £650,000, therefore no inheritance tax was payable up to this amount. Nonetheless because the combined value of the properties equated to £680,000,   £30,000 over the nil rate band threshold, the £30,000 was immediately liable to inheritance tax at 20%.

As one can imagine, this couple who were trying to avoid inheritance tax charges on their deaths were not too thrilled to discover that inheritance tax was still due. To make matters worse, because the couple continue to live in the family property it will still be included as part of their estate for inheritance tax purposes when they die and their children will be taxed anyway. However, the transfer of the rental property into trust had effectively removed it from their estates for inheritance tax purpose on death.

In addition to the advice on inheritance tax, advice on capital gains tax and income tax should have also been provided. The transfer of the properties into trust triggered a disposal for capital gains tax purposes. Luckily for the couple there were two relief's available to them to eliminate the tax payable.

Firstly, Principal Private Residence Relief could be claimed for the family home, meaning that no capital gains tax would be payable on this. Secondly, the couple could claim holdover relief for the rental property meaning they would not be liable for the capital gains tax themselves. Instead the trustees  in acquiring the property for the original acquisition value that the couple  first paid will be liable for the capital gains tax on the property’s rise in value when they dispose of it.

The downside of all this to the couple  is that from the date the trusts were created, they   could no longer receive the income  from the rental property, as this would have to be paid into the trust and the trustees will have to pay the income tax on this.

Many will be surprised to learn about the numerous tax liabilities trusts can create and those who wish to create them must ensure they receive sound advice beforehand. For this poor couple the tax advice came too late but this certainly highlights the importance of instructing a quality solicitor who can advise you on the multiple implications of any transaction you wish to make.  

Posted by Lucy Newman, trainee in the private client practice group.

Lucy graduated from the University of Nottingham in 2011 with a degree in Politics and American Studies (International Study). She went on to complete the Graduate Diploma in Law and Legal Practice Course at the University of Law (Bloomsbury).

After working as a paralegal in the Real Estate team for a large city law firm, Lucy joined B P Collins LLP in September 2014.