Families who bought properties overseas, either for personal or investment use, need to carefully plan how they will pass on those assets when they die, or risk unforeseen outcomes and hefty taxes.
It’s not just the high net worth bracket of families who are affected. A flood of overseas property-buying in the 1990s and since means we are now looking at the first generation of many Irish families who are facing the challenge of how to pass on an overseas property.
“It’s very prevalent for very ordinary families to have this complexity,” says Emma Heron, head of Whitney Moore’s private client department.
Returning Irish expats who hold foreign assets, property or otherwise, also need to consider their succession planning.
So what do families need to know?
First off, it’s important to understand what you don’t know. As Heron notes, one school of thought from a person leaving property behind can be “well I’ll be gone”, so they don’t really want to think about it. But they might also be planning their estate on false assumptions.
As Heron says, some people assume that EU succession rules, in place in Spain and France for example, also apply here, or that because they live in Ireland, such rules don’t apply to them.
Some people might think they don’t fit in the wealthier cohort who would need inheritance tax planning.
“It’s probably an illusion among people that it really only affects ultra-high-net-worth families,” says Heron.
It could be someone who doesn’t think they’re particularly internationally mobile. They might have a business here, a holiday home abroad, and children scattered around the world.
“That’s who it catches – and it’s a lot of families in Ireland,” says Heron. And it’s bringing complications.
Foreign law
A common example, says Heron, is where a couple leaves their holiday home in France or Spain to each other, thinking that their Irish will ”stretches across the border”.
However, as Heron points out, that ”won’t necessarily” be the case. So, they might find that their Irish will only deals with Irish assets, which can result in unintended beneficiaries, unfamiliar systems and delays in probate.
And if a person who dies owned a business, “it can lead to disruption in the business that no one foresaw”, as their successors have to sort out the foreign property issue.
Even where the process does run smoothly, be prepared for extra work and delays.
Gillian McGough, an associate solicitor with McElhinney & Associates in Co Donegal, cites a recent example of a client with a property in Spain.
‘If you can do it when it’s not at a crisis point, or under pressure, or at a time of bereavement, it’s calmer, it’s easier and it’s done better. It can be so problematic afterwards’
— Emma Heron of Whitney Moore, on planning ahead for succession
The client had set out her plans for all her assets in her Irish will, and the distribution of those assets went smoothly upon her death. However, dealing with the Spanish property was delayed until after her Irish estate was sorted out, and the process also required translation of relevant legal documents etc.
So homeowners need to do their homework. Do forced heirship rules apply in the jurisdiction abroad where they hold property, for example? Do these rules suit, or do they need a will setting out their wishes?
Taxes are another part of this, and you might need to check out whether a double taxation agreement between Ireland and the country where your property is located is in place.
Irish capital acquisitions tax (CAT) will apply if any of the following three scenarios applies: a person leaving an asset is resident in Ireland; a beneficiary is resident in Ireland; or a property is located in Ireland.
Some jurisdictions tax the estate, for example, though most in Europe tax the beneficiary, as happens in Ireland.
Consider Spain. As Ireland did not adopt the EU succession regulations, but Spain did, that country can decide upon your death whether Irish or Spanish law applies if you hold a home there.
Depending on the circumstances of your death, it could be the case that Spanish rule applies.
[ The property I was due to inherit was sold. Where does that leave me?Opens in new window ]
In that event, as is common in civil law jurisdictions, it means that forced heirship would likely apply – that children will be forced to inherit, above the spouse.
This can give rise to inheritance tax issues on behalf of the children, while it might also leave the will open to being contested, or to family problems, if the intention had not been that the children would inherit.
“I’m not trying to be alarmist,” says Heron, “It’s just a prompt to encourage people to take a step back while they have the benefit of time on their side.”
Selling the asset might be one option to remove any confusion in the event of a death – but this can bring other issues. “For tax reasons alone, it can be better for them to hold on to it and pass it on death,” says Heron.
What to do
In short, plan ahead. Typically, Heron deals with the effect of inheritance tax regimes, and she says it’s much better to take a proactive approach in advance, to secure better outcomes.
Blended families, which are becoming more common, can also be an issue. What if a property owner wants to leave a foreign property to a new partner, but instead, under local law, it goes to the children of their first marriage?
“If you can do it when it’s not at a crisis point, or under pressure, or at a time of bereavement, it’s calmer, it’s easier and it’s done better,” advises Heron. “It can be so problematic afterwards.”
Of course, some property owners may not want to look at such issues now, “as it might mean an awkward conversation”.
“There is a reluctance to come in and talk about wills,” agrees McGough.
Planning means you can ensure the outcome that you desire. “You can try to structure your will so that Irish law applies,” says Heron, adding that this can mean appropriate wording in your will that seeks to make it very clear that foreign assets are to be governed by Irish legislation.
But, ultimately, the final decision on precisely what happens will still likely be up to the country that the asset is based in.
Habitual residence will also come into play. If the owner of a holiday property ends up selling their home in Ireland, for example, and moving to the Continent permanently, but their will is written in Ireland, it can further complicate issues. “If you’re setting up home with the intention of staying there permanently, you should really get succession advice in the jurisdiction that you’re permanently residing in,” advises Heron.
It may make sense to get this local advice in any case, and to make a local will and get tax advice in the country where the asset is located.
“Ideally go and get it done there. Get your Spanish solicitor, tax advice and will in place there,” says McGough, emphasising that this approach should help to smooth the administration of your estate after your death.
Relief
Careful planning can also mean being able to avail of various reliefs such as dwelling house or agricultural relief.
As McGough notes, if you have land but don’t currently meet the various tests required for agricultural relief, you may have time to address this. One of her clients was able to use the relief when passing on a vineyard in France, for example.
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Sometimes it may make sense for inheriting children to get a tax bill, as they might be able to be offset this against taxes in Ireland. This is pretty prevalent for clients who have US-based assets, says Heron.
Blended families, which are becoming more common, can also be an issue. What if a property owner wants to leave a foreign property to a new partner, but instead, under local law, it goes to the children of their first marriage?
Or what if a child’s marriage breaks down; as Heron notes, there are ways in which you can draft your will to try to protect your estate as best you can from being automatically included in a marital dispute of one of the children.
“There are different mechanisms out there but you need to know about them, and you need to plan,” she says.
Sometimes, the best option – once you have investigated the circumstances – is to do nothing, and let the laws of intestacy set out what’s going to happen. “You will have people who will happily let forced heirship be the consequence, as it will work out how they want it to,” says Heron.
In any case, while the process may not be straightforward, and of course there will be a cost to tax planning, getting that done in advance can be beneficial for all parties.
“One of the more rewarding elements [of this job] is that you can almost see the weight lift off people’s shoulders,” says Heron.