At the time of writing, the UK’s future relationship with the EU remains almost as uncertain as it was over 1,200 days ago when the result of the referendum was announced. It would therefore be prudent to consider now the impacts on your succession planning if Brexit takes place.
There are three main areas of your succession planning strategy that could be affected in the event of Brexit: 1 Treatment of property owned in the EU, 2. Treatment of trusts, and 3. Loss of EU tax reliefs.
Property owned in the EU
Current EU regulations allow for a UK citizen to make an election that Scots law is to apply to the succession of their property located in a jurisdiction elsewhere in the EU.
It is not uncommon for the law in different countries to restrict to whom property can be left in a Will, for example, prevent you leaving the whole of a property to your spouse. Scots law does not have such rules related to homes, and you can leave them to whomever you like. It is therefore advisable to make a carefully drafted election in your Will to ensure your Scottish Will is effective in determining the succession of your EU based property.
Making an election that Scots law applies in your Will provides no guarantee that the foreign jurisdiction will accept this. This may also prove increasingly difficult following Brexit, where UK citizens may not retain the benefit of this EU regulation. Therefore, putting in place a Will in the jurisdiction where that property is based may also be advisable.
Treatment of trusts
Trusts can be an incredibly valuable tool to use in estate planning to mitigate future tax liabilities while retaining elements of control. So long as they are effectively constituted and held for a sufficient time, assets held in a trust will generally be classified as not being part of the individual’s estate when it comes to paying inheritance tax. This can result in significant tax savings. Trusts are also useful for succession planning by enabling assets to be protected from those you would not wish to inherit them, or to put some conditions on when and how the inheritance is to be received by beneficiaries.
However, not all jurisdictions outside the UK recognise Trusts, and their effectiveness may be limited when placing in Trust assets which are located outside of the UK. Post-Brexit, recognition of UK Trusts may be given even less credence in remaining EU jurisdictions.
For example, France introduced measures in 2011, whereby UK trusts can now be taxed in France. This means is that if there is a trust in a UK Will covering property in France, then it will be subject to ‘droit de succession’, the French equivalent of inheritance tax. In France, there is no inheritance tax between spouses and there are generous allowances for other close relatives, such as children. Trusts, however, are treated as non-relatives and may be taxed at the highest rate. For a discretionary trust where non-relatives may benefit, this can be as high as 60%.
EU regulations have over the years sought to limit the privacy of Trusts for tax purposes. Recent rules, which were a result of EU regulations, imposed that Trusts must now be registered and certain details made public. Following the UK’s departure from Europe, these rules are likely to remain in place, but any future EU regulations affecting Trusts will no longer have an impact on UK established Trusts.
Loss of EU tax reliefs
There are various tax reliefs available in the UK, which currently can also be claimed against the value of assets located in the European Economic Area (EEA). These include agricultural property relief, capital gains tax relief and gifts to charities. Once the UK is no longer part of the EU, it is uncertain whether these benefits will remain. As there is a risk that these reliefs may soon not be available on foreign assets, it may be worth considering restructuring your investments in a more tax-efficient way, if possible.
Much confusion still exists as to what the full impact of Brexit will be (if it even goes ahead). Brexit may have significant implications for succession planning and where assets are owned in another EU country in particular, it is advisable to seek professional advice now to see what changes you may want to make to your estate planning.
Andrew Paterson is a Partner with Murray Beith Murray