International Wills: What your English Solicitor does not tell you (but should)

Drafting Wills for British or American Clients with Assets outside the UK / USA

You are a British or American citizen but have assets abroad, let’s say in Germany, Austria, France, Italy or Spain. Your English solicitor or your American lawyer suggests you make a Will which deals only with your national estate, i.e. the Will is restricted in such a way that it shall only apply to your assets located within the UK or the USA. The lawyer tells you that you should set up separate Wills for your foreign assets.

Is this really the best approach?

Well, this approach is extremely risky, because if your British or American estate lawyer does not consider the effects of your English or American Will in these other countries, your survivors are almost certain to suffer harsh consequences in regards to foreign inheritance taxes, may have to go through expensive and tedious foreign probate proceedings and they may even be confronted with foreign succession rules they have never heard of before but which are now applicable to the estate, e.g. forced heirship, obligatory heirship, elective share rules for surviving spouses, children and even parents of the deceased. In other words: The British or American beneficiary (e.g. the surviving spouse) will have to share the German, Austrian or French estate with the children or even the parents of the deceased because the testator was unaware of the foreign intestate succession rules or the compulsory elective share statutes which exist in many countries, especially those influenced by the French Civil Code (“Code Napoleon”), inter alia Germany, Austria, Italy and Spain. But also Islamic countries. An overview of this “Forced Heirship” concept is available on Wikipedia.

Thus, the standard “make one separate will per jurisdiction and hope for the best” approach is only suitable for those who also prefer to jump into a swimming pool without checking first whether there is even enough water in it. Those who would rather prefer to protect their survivors from unnecessary foreign taxes, legal costs and endless probate proceedings might want to consult an expert on international will preparation and international inheritance tax mitigation.

Just one simple example: How to avoid 5,000 Euros in German probate and translation fees and nine months waiting for the German grant? The testator who owns property in Germany can, while still alive, issue a so called transmortal or postmortal power of attorney which allows the transfer of the German property upon death – without the need for German probate. This is only one of many options to make life easier for your executors and beneficiaries. More on how to avoid probate in this post: How to Access German Assets without having to go through German Probate

Surprise Visit from the Foreign Tax Man?

Foreign inheritance tax is an issue which is very often overlooked or simply ignored by British solicitors or American lawyers. Especially one constellation leads to trouble on a regular basis because common law succession lawyers do not have this issue on their checklist when preparing a Will: If the testator is British, lives in the UK and only has assets located within the UK, then there may still be foreign inheritance tax due if the beneficiary lives abroad, let’s say in Germany, France or Spain. This is due to the fact that many European countries levy tax not on the estate as such but instead tax each individual benefiary, similar to the concept of income tax. In other words: In spite of the British estate having already been taxed in the UK, the son, daughter or grandchild who receives all or part of the estate from his or her parent or grandparent will have to pay German, French or Spanish inheritance tax on top of British IHT. Whether this tax burden can at least be mitigated depends on whether there are double taxation treaties in place or whether the respective country at least offers unilateral relief (for Germany see here).

All these (any many other) problems often remain unaddressed when a British client who has either assets or relatives abroad discusses his or her Last Will and Testament with a British solicitor or accountant. Many solicitors merely recommend to the client to consult a foreign lawyer. This is not always helpful because, even if the client does, such a foreign lawyer then also only sees his / her side of the story, i.e. German, French or Spanish inheritance law. Such foreign lawyer is, however, usually unaware of British issues like nil-rate band, unlimited spouse exemption, deed of variation etc and may thus make suggestions which sabotage the British side of estate planning. In order to come up with a truly working international will, the lawyer drafting the will either needs to be an expert in both countries’ succession and tax laws or the lawyers from the various countries need to team up. This may not be cheap but it is still better than to be unaware of foreign inheritance taxes or forced heirship laws. For the surviving beneficiaries, ignorance of the testator is certainly not bliss in this regard.

What makes matters worse is that a Deed of Variation is not being accepted by most European tax authorities. Instead, using such a Deed of Variation will in most cases be considered a second taxable event, i.e. a gift from the beneficiary mentioned in the Will to the person benefitting from the Deed of Variation. This may trigger additional gift tax. Thus, professional IHT planning is even more important in international constellations, because the content of an English (or US American) will can’t be changed anymore even if the tax consequences later turn out to be unpleasant. More on this here: Deed of Variation and International Succession

Seminars for Lawyers and Accountants with International Clients

Since 2003, the succession and tax lawyers of Graf & Partner specialise in international estate planning and will preparation with a strong focus on British-German, American-German, British-Austrian and American-Austrian inheritance cases and probate applications. We also know our way around the succession and inheritance tax laws of France and Spain.

German succession and inheritance tax law expert Bernhard Schmeilzl regularly gives presentations and conducts inhouse seminars for British and American lawyers and accountants who advise clients who possess foreign assets or who have relatives abroad who shall inherit or receive gifts or legacies. More on these seminars here: Advising Clients with Assets Abroad

For more information on German-British probate matters and international will preparation see the below posts by the international succession law experts of Graf & Partners LLP:

Or simply click on the “German Probate” section in the right column of this blog.

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The law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. If you wish us to advise or represent you in a German or cross border inheritance case please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

Deed of Variation and International Succession

Using a Deed of Variation to mitigate UK Inheritance Tax can backfire if there are Foreign assets or Beneficiaries outside the UK

If someone dies intestate and leaves both a surviving spouse and a child (or children), then UK inheritance tax is due if the value of the estate exceeds GBP 900,000. In these cases, it is tempting to make use of a Deed of Variation in order to “shift” all or a significant additional portion of the estate to the surviving spouse who is entitled to an unlimited spouse exemption. In purely British inheritance cases this is fine.

However, if the deceased or any of the beneficiaries is domiciled or habitually resident outside the UK, for example in Germany, the foreign inheritance tax rules must be taken into account, because then a Deed of Variation may trigger foreign IHT (in addition to UK IHT).

In Germany, as in most continental European jurisdictions, the instrument of Deed of Variation, is not accepted. In other words: While such a Deed of Variation is recognised in Germany as a binding agreement between the parties, such a Deed of Variation does not retroactively alter the IHT situation, i.e. German IHT is always being based on the actual circumstances which had existed upon the moment of death.

Therefore, if the clients decide to use such a Deed of Variation to mitigate UK IHT by “shifting” the assets to the surviving spouse, this will be considered by the German tax office as constituting a gift from child to parent, because the child effectively gives away a portion of his/her inheritance which – due to the German principle of immediate and automatic accession – he/she had already received.

Unfortunately, for such a gift from a child to a parent (upstream gift), German IHT law only grants a personal allowance of EUR 20,000 (twenty-thousand) and the exceeding amount is taxed at 15% (or 20% depending on the amount). In the opposite direction (parent to child, i.e. downstream), there is a personal allowance of EUR 400,000. Upstream lifetime gifts are obviously not considered as being worthy of significant tax allowances.

Thus, while a Deed of Variation may reduce the UK IHT, it will at the same time trigger German IHT if the amount transferred is in excess of EUR 20,000. Yet, since UK IHT is 40% and German IHT in this case only 15 or 20%, a Deed of Variation may still make economic sense. Even a “small” Deed of Variation granting the surviving spouse a specific legacy / bequest of EUR 20,000 (in addition to the statutory legacy of GBP 250,000) would reduce UK IHT by EUR 8,000.

However, one must also consider that UK IHT paid on UK assets can be deducted from any potential German IHT by way of unilateral relief, rendering the possible benefit of a deed of variation even less important from an overall tax perspective. The actual effect must therefore be calculated from an overall perspective, taking into account all national inheritance taxes.

Finally, it should be noted that a Deed of Variation transferring assets upstream goes against the general objective of transferring wealth onto the next generation (downstream). In case of a significant gift child to parents, these assets now transferred upstream will then later have to be transferred back from parent to child, which depletes the personal allowance available to the child.

Therefore, in international inheritance cases, a Deed of Variation may cause more trouble than positive effect.

For more information on German-British probate matters and international will preparation see the below posts by the international succession law experts of Graf & Partners LLP:

Or simply click on the “German Probate” section in the right column of this blog.

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Solicitor_SchmeilzlThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. We are experts ininternational succession matters, probate and inheritance law. If you wish us to advise or represent you in a German or cross border inheritance case please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

Careful with Deed of Variation if Estate comprises Foreign Assets

Using a Deed of Variation in the UK may cause additional Taxes Abroad

Let’s take an easy example: An English testator owns property or a significant investment in Germany, which already triggers German inheritance tax, even if neither the legator nor the beneficiaries are resident in Germany. He has two children and gives the German house (or flat) to child 1, the German investment to child 2. For whatever reasons, the children prefer a different distribution of these assets and thus agree to use a Deed of Variation. From an English law perspective: no problem. From a German tax law perspective: potential financial mayhem for the English beneficiaries. Why?

The German principle of universal, direct and immediate accession of the estate (Generalsukzession, Vonselbsterwerb) means that the beneficiaries (Erben) automatically acquire the estate (or their share of the estate) literally in the second the legator dies. There is no administration persiod, no personal representative etc. From a German inheritance tax perspective this means that it is clear in the second of death of the legator, what the beneficiary has inherited and what the German IHT debt is. This tax situation cannot be changed later on by a deed of variation. This legal instrument is unknown to German law.

The beneficiaries are, of course, free to agree amongst themselves that they wish to distribute the assets differently. However, this is a separate transaction, a second taxable event under German law.

Looking at the above example this means that the German tax office will first levy tax on the situation as it presentated itself from the black letter wording of the Will, i.e. child 1 needs to pay German inheritance tax on the value of the property, child 2 on the value of the investment. The Deed of Variation now is a second, separate taxable event, which can trigger German gift tax (if the house and the investment have different values) and also German property acquisition tax (Grunderwerbsteuer).

Also, there is a risk that the German tax office will not fully recognise the right to apply for unilateral relief (section 23 ErbStG) anymore, which is normally available in cases where UK IHT has already been paid on assets which are also relevant for German IHT.

The details are horribly complicated. Whether actual taxes become due depends on a number of factors, including domicile and residence of everyone involved, nationality, nature of the investment and the relationship between legator and beneficiary as well as between the beneficiaries, because German inheritance tax law allows for personal allowances. These IHT allowances (Steuerfreibeträge) differ hugely (from EUR 20k to EUR 725k), depending on degree of kinship.

The situation is even more complex, if either the legator or any beneficiary had or has a residence in Germany, even if it is just a holiday flat. Because this qualifies the beneficiary as a “Steuerinländer” (tax resident) which means that German IHT applies to either the entire estate (if the UK legator had a German residence) or to all assets the beneficiary with residence in Germany receives, even if these assets are outside of Germany (for details see the posts on German interitance and gift tax listed below).

In summary: If foreign assets are part of an estate, probate lawyers must be extremely cautious and evaluate the inheritance taxes in all countries concerned, before they recommend a deed of variation to be used. Any property swap and any disproportionate distribution of cash or other assets can trigger unexpected additional taxes in some jurisdictions.

For more information on German-British probate matters and international will preparation see the below posts by the international succession law experts of Graf & Partners LLP:

Or simply click on the “German Probate” section in the right column of this blog.

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Solicitor_SchmeilzlThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. We are experts ininternational succession matters, probate and inheritance law. If you wish us to advise or represent you in a German or cross border inheritance case please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.