Now might be an advantageous time to utilise lifetime gifting to reduce Inheritance Tax liabilities, but there is also a broader tax picture to take account of too.
An incoming piece of EU succession legislation is something no owner of a holiday home can afford to ignore, explains Wendy Spires, Director of Content and Research at findaWEALTHMANAGER.com.
Having a second property in sunnier climes is a sign of arrival for many affluent individuals, with holiday home ownership often serving as a precursor to an idyllic retirement with long stints spent in European countries such as France and Spain. But while succession law might be very far from the minds of sun-seekers, it emphatically shouldn’t be.
Almost 45,000 cross-border succession scenarios play out every year and with these worth a total of as much as €120 billion and rules differing all over the EU it is easy to imagine the depth of legal wrangling created by some estates. The good news, however, is that those who are thinking of buying abroad, and even those who already have, can take advantage of a very pragmatic new piece of European Union legislation that could largely sweep away these concerns.
Brussels IV, which comes into force on 17 August 2015, was designed three years ago as a means of reducing the labyrinthine complexities that can arise when a person owns a foreign property in a country where succession laws are at variance with those in their home jurisdiction. What many people may not fully appreciate is just how prescriptive some countries can be as regards to whom you leave your assets to when you pass away.
To illustrate, we can look at the perennially popular destinations of France and Spain. In the former there is the rule of “la reserve”, which means that you have to leave a certain proportion for your children as a minimum. In France, those survived by two children would have to bequeath at least a third of their estate to each, meaning that only the remaining third is up for debate. Likewise in Spain your children are entitled to two-thirds of your estate, but English law is mostly – but not always – given precedence in probate proceedings concerning Britons (extensive back and forth between the two countries’ courts is surprisingly common).
In fact, you will find that similar succession rules are in place in many European countries. This sort of legislative detail highlights just how important taking proper legal and financial advice is when making any major decisions about your wealth. Neglecting cross-border nuances has created serious complexities for families during already very difficult times.
Happily, owners of a second home in those EU countries that are signatories to Brussels IV can now opt out of having those regimes’ succession laws applied to their estate – simply by adding a Brussels IV clause to their will. Yes, this will entail more legal costs but could head off disaster in the future. Disputes are commoner than one might think, particularly when one considers that many countries’ laws are very strict on including all of a person’s genetic children even despite the testator’s wishes.
The UK has not actually signed up to Brussels IV (nor have Ireland or Denmark), however it is the location of your second property which matters here. Those applying a Brussels IV clause to their will have the law of the country in which they are “habitually resident” applied to their estate. That said, as with many matters of residency for tax or legal purposes, there remains a degree of uncertainty over how judgements will be formed on where a person is to have been deemed “manifestly more closely connected with”. Therefore, those who intend to spend a lot of time in their second home should certainly seek expert legal advice, as should those with more than one nationality.
Brussels IV is intended to reduce legal uncertainty and by extension make cross-border asset ownership a simpler affair. It does not entirely remove potential pitfalls, however. Certain cross-border scenarios are subject to an international law concept called “renvoi” which means that one state’s legal authorities can refer a case to another jurisdiction (the originator country or a third one) to be determined if it is believed that the application of those laws would be more appropriate.
Declarations (or, officially, “elections”) made to build Brussels IV into your will won’t actually take effect until 17 August 2017, but it would be wise for owners of holiday homes to seek advice at the earliest possible opportunity. As with every element of wealth management and estate planning, the sooner you start making plans the more options will be open to you and your family.
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