In Spain for decades Brits’ have been immune to Spanish forced heirship provisions because Spanish law has allowed the law of a person’s nationality to govern the devolution of their property; but this is all set to change in 2015 in a way that could cause massive financial and emotional turmoil.
Until now Spanish law has allowed the law of a person’s nationality to apply to the devolution of their property; but in an attempt to simplify succession law (who gets what when you die) across Europe, this will change on 17th August 2015. From that point the default position will be that a person’s ‘habitual residence’ and not their nationality will determine the devolution of their property. The impact on the families who are affected and who do not take the appropriate action could be devastating.
Many people owning (or thinking of buying) property in Spain will be aware that the law of the State where the property is situated decides which law governs the taxation and devolution (who gets what when you die) of your EU real-estate. The imminent change in Spanish law from nationality to habitual residence means that the devolution of the property of foreigners (including Brits’) living in Spain will be subject to Spanish domestic law, and no longer British law.
Many will also be aware that the system of law practised in Spain is Civil law and in most Civil law jurisdictions an individual’s property 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 likely to be (at least partly) ineffective if it conflicts with forced-heirship rules. Instead your children, including estranged children and children from previous relationships could inherit your property on your death ahead of your spouse, regardless of your wishes. If you have no children the forced heirship provisions could instead direct a portion of your estate to parents or even grandparents.
The change in law has come about courtesy of a piece of European legislation with the ‘catchy title’ of EU regulation 650/2012, otherwise known as Brussels IV… We’ll call it the ‘Regulation’.
He good news is that the Regulation contains provisions that have the potential to protect British owners of Spanish property.
Under the Regulation, after 17th August 2015, any British national who has property in Spain (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 (or choose one of their nationalities if multiple) 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.
This may sound like a ‘silver bullet’ solution to the forced heirship provisions which await British Will-makers, but what many people are not aware of is that the new rules will only benefit those British 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 property.
This could be made in a Will made in Spain or the nomination could be made in your English 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.
Interestingly, the Regulation does not restrict the choice of law to EU nationals and so, for example, a Hong Kong Chinese national with property in a participating EU State could nominate Hong Kong law to apply to the succession of their property; a New Zealander could nominate New Zealand law; a Japanese, Japanese law, and so on.
Some readers may have heard that the UK, Ireland and Denmark have all opted out of the Regulation and so those readers may question whether the Regulation relates to British nationals. Well the opt-out simply means that it is not possible to make an election under ‘British’ law for ‘foreign’ law to apply in Britain to British assets, but it does not mean that Britons cannot make an election under the laws of participating EU States.
Another potentially useful element of the Regulation is that a European Certificate of Succession (ECS) 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 Briton living in Spain who also has property in Italy or France because the certificate will be recognised in all of these jurisdictions; but it probably won’t help a person with sole British nationality who is habitually resident in the UK, because the UK opt-out means Britain will not be able to issue an ECS.
I should mention that even after 2015 (as things stand now) a UK person will still need to obtain an English grant of representation to collect and distribute UK assets, and tax may also be payable on the Spanish property but the ability to nominate which law applies means that the possible ‘nightmare’ forced heirship provisions that will occur in Spain after 17th August 2015 can be avoided.
As for tax, in Spain it is administered by the regional governments and 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 Spanish property. This is because in Spain 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, in Spain there is a much higher rate of tax and a lower tax free allowance for unrelated beneficiaries than for close family members. By contrast children usually have the lowest tax rate and the highest tax free allowance.
Importantly, in some Spanish jurisdictions there is no spousal exemption which can mean that tax has to be paid on the matrimonial home on the first spousal death.
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 anecdotal evidence to suggest that some member States may not met the deadline 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.