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.

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. 

Signed, sealed but not delivered | Private client

We all make mistakes; it’s a fact of life.  During my time as a trainee, I've come to learn where I am most likely to make mistakes and I've developed ways to help avoid them. However, there are always some mistakes that don't get spotted until it is too late. The recent case of Marley v Rawlings and another is the perfect example of this. 

Before their death Mr and Mrs Rawlings instructed a solicitor to prepare simple mirror wills.  The wills provided that on the first death, the whole estate passed to the survivor and on the death of the survivor, everything was to pass to Mr Marley, who was also to be the sole executor.  Mr Marley was treated by Mr and Mrs Rawlings as their son and lived with the couple, although he had not been formally adopted by them.  Mrs and Mrs Rawlings had children of their own but they were estranged and were not to benefit under the wills.

Mr and Mrs Rawlings signed the wills in the presence of their solicitor, but the wills had inadvertently been muddled up which led to Mr Rawlings signing Mrs Rawlings' will and vice versa.  The mistake was not noticed at the time and, in fact, did not come to light until the second death, that of Mr Rawlings. 

It is possible to rectify a will under section 20 of the Administration of Justice Act 1982 where the will is so expressed that it fails to carry out the testator's intentions because of either a clerical error or a failure to understand the testator's instructions.  Under section 20, Mr Marley applied to the High Court to rectify the will because of a clerical error. The claim was defended by Mr Rawlings' two sons who, under the intestacy rules, stood to inherit Mr Rawlings' free estate worth around £70,000. 

At first instance, the High Court held that the will did not comply with section 9 of the Wills Act 1837 (which sets out the rules for attestation of a will) because Mr Rawlings did not intend to give effect to the will he signed as he signed his wife's will. In the alternative, the Court held that it had no power to rectify the will as the error was not a clerical one.

Mr Marley appealed the decision but the Court of Appeal also refused to rectify the will, again on the basis that it did not comply with section 9 of the Wills Act 1987 and so was not valid.  It was not possible to consider rectification of a will which was not valid.

Finally the claim was heard before the Supreme Court where it was unanimously decided that the will could be rectified on the basis of clerical error.  In reaching this decision, the Supreme Court held that wills should be interpreted in the same way as commercial contracts.  The Supreme Court also held that the formal requirements of section 9 were satisfied because Mr Rawlings had executed the will with the intention of it being his will.  There was no evidence to suggest that his intentions were other than to make a will to benefit Mr Marley on the second death.  

The Supreme Court decision has clarified the position that a "clerical" error need not be limited to a drafting error.  Although many commentators are suggesting that the widening of "clerical" error raises great uncertainty, it is hard to see that rectification will be available where the testator's intentions are in doubt. 

Based on the facts, I think most people (myself included) would feel that the right decision has finally been made – it has just taken a somewhat tortuous process and surely a great deal of expense to get there. This case clearly shows that spending a little time checking documents can result in a lot of time and money being saved in the future. And let's not forget the possibility of negligence claims arising. Whether you are a trainee or fully qualified solicitor, this case shows that it pays to be diligent. There is a definitely a lesson to be learned here!

Posted by Harriet Betteridge, trainee in the private client practice group.

Harriet started her training contract in September 2012 having previously worked in the Litigation team as a paralegal. Her previous experience includes working at a group of law centres in south London and in the Legal, Compliance and Risk team at the Charities Aid Foundation.