CHAPTER 4: The Applicable Law
54. The Commission's proposal envisages a single
test of habitual residence to determine the applicable law to
apply to a succession, subject to a testator making a valid choice
of a different applicable law of his or her nationality. The same
test would be applied to cross-border successions involving a
third country. This would only resolve any conflict that there
may be between Member States as to which law is to apply to the
succession. Any conflict with the third country law could only
be resolved by agreement with that third country.
55. Whilst our witnesses mostly agreed that there
was benefit to be derived from simplifying the issue of the law
to be applied to cross-border successions, even this presents
considerable challenges.
The test for determining the
applicable law
56. At present the connecting factors used in
the laws of the Member States to determine the applicable law
are: nationality, the place where immoveable property is situated,
domicile and habitual residence. They are used both where the
cross-border elements to the succession are limited to other Member
States and where they extend to third countries.
57. Although it is possible to be certain of
the place where immoveable property is situated, no witness suggested
that this was a connecting factor which could be applied to the
whole of the estate. In cross-border successions it would result
in different laws being applied to determine and administer the
succession of different property situated in different states
but belonging to the same deceased. This is already a feature
of the UK laws of succession. Oliver Parker, a senior lawyer in
the Ministry of Justice, indicated that the UK system of treating
moveable and immoveable property differently had been widely criticised
by academic commentators and also by the judiciary in a handful
of decided cases. He described it as a historical anomaly although
he had not detected pressure to change it (QQ 128-129). The
joint evidence of the Law Society, the Society of Trust and Estate
Practitioners (STEP) and the Notaries Society of England and Wales,
supported a single law applicable to the whole of a person's estate
(p 81) as did the Hon. Mr Justice David Hayton, a Justice
of the Caribbean Court of Justice and Fellow of King's College
London (p 70). The Chancery Bar Association cited judicial
criticism of the UK system[18]
and considered that it was hard for people to understand (p 64).
Professor Elizabeth Crawford, Professor of International
Private Law at Glasgow University and her colleague, Dr Janeen
Carruthers, Reader in Conflict of Laws, saw the benefit of a single
law applicable to the whole estate, but considered that there
needed to be sufficient certainty in the connecting factor for
it to be workable.
58. We agree with the Commission's objective
of seeking a single law to apply to the whole of the estate of
a deceased. However to achieve this objective it is necessary
to find a suitable connecting factor between the succession and
the applicable law which can be applied with reasonable certainty.
59. None of our witnesses pressed for nationality
to be the connecting factor. It risks providing an outcome that
would be inconvenient to all those concerned in the succession,
as could be the case where a national of one state had settled
at an early age in another and raised a family there. The Government
accepted that habitual residence stood a better chance of agreement
than domicile (Q 135). Andrew Francis welcomed the use of
habitual residence, in principle, as the connecting factor (p 67)
and Richard Frimston also considered it preferable to domicile
(Q 65).
60. However the EU legislator has an open choice
as to what should be the connecting factor. The proposal uses
habitual residence without further definition for this purpose.
Given the disadvantages of nationality and the location of property
as connecting factors and the prospect of agreement around habitual
residence, there is merit in using the concept of habitual residence
as a starting point for finding an appropriate connecting factor.
61. The term "habitual residence" is
used in other EU legislation, sometimes defined in that legislation
and sometimes not. But whether or not it is defined, the European
Court of Justice interprets the concept in its specific legislative
context and an interpretation used in one context cannot be directly
transposed to another.[19]
A clear majority of our witnesses considered the term "habitual
residence" needed definition. Professor Matthews pointed
out that the use of the term in the proposal was different from
its use in existing legislation. In existing legislation the concept
is largely directed at the short term purposes personal to the
person concerned by the legislation. But in succession the effects
are not on the deceased but on the heirs and creditors of the
estate and those effects could stretch over generations. To leave
the term undefined was, in his view, a political fudge (QQ 13-14
and p 6-7).
62. The problem areas identified concerned, in
particular, workers temporarily posted abroad and those retiring
abroad. However, there was no clear sight among our witnesses
of what the definition should be. The Hon. Mr Justice David
Hayton, who led the UK Delegation to the Hague Conference preparing
the Hague Succession Convention,[20]
recalled the difficulty in negotiating a definition then (p 71).
In the event only the Netherlands signed up to this Convention.
He suggested refining the concept of habitual residence to exclude
the place where a person only intends to reside for a temporary
period; in which case habitual residence could revert either to
the previous habitual residence or to the nationality of the person
concerned (p 70).
63. Jonathan Faull agreed that the interpretation
of the term depended on the context of the legislation but added
that the concept would have to be applied to the factual situation
in the particular case under consideration. The Commission's legal
advice was that it would not be useful, even if it were possible,
to provide a general definition of habitual residence because
it would almost certainly be too vague (Q 101).
64. This approach would, however, mean that more
individuals than would otherwise be the case would be faced with
uncertainty as to how to interpret the term "habitual residence"
and would be forced into the delay and expense of litigation,
ultimately in the European Court of Justice.
65. A single factor to provide the connection
between a succession and the applicable law is difficult to find.
There must be a compromise between providing an appropriate connection
between the succession and the law to be applied to it, and providing
certainty. We believe that the concept of habitual residence should
be used as the basis for the connecting factor in this proposal.
However it is legally possible and necessary in practice to define
the concept. Citizens should not be left to bear the expense of
refining the concept through litigation. The definition should,
as a minimum, address in a satisfactory way the position of employees
posted to another Member State and those who retire to another
Member State.
Choice of applicable law
66. Article 17 of the proposal would introduce
the possibility for individuals to stipulate in their wills that
the law of their own nationality should apply to their succession
when they die. This choice is not found in the laws of most Member
States and does not exist in any of the laws of the UK.
67. One underlying reason for preventing or limiting
a choice of applicable law is that the wider the choice the greater
the chance of an inappropriate law being chosen to govern the
succession. Another reason, relevant to those states whose law
of succession includes forced inheritance, is that testators could,
if they wished, exploit the choice in order to avoid their property
passing as prescribed by the forced inheritance rules.
68. The introduction of an element of choice
was generally welcomed by the witnesses, although some considered
that it did not go far enough. Professor Matthews started
from the position that if there was real mutual respect between
Member States for each other's legal systems then it would be
reasonable to allow a choice of any EU law to apply. But he conceded
that was unlikely to be accepted and put forward a number of possible
limiting connections: place of birth, where the testator's parents
come from, and where property is owned (Q 19). The joint
evidence of the Law Society, STEP, and the Notaries Society favoured
extending the choice to habitual residence at the time the choice
is made (p 81).
69. We welcome the introduction of a choice
of applicable law, not least because a choice is comparatively
easy to ascertain. We accept that the choice must be limited to
preserve an appropriate level of connection between the law chosen
and the succession. Limiting a person to choosing the law of his
or her own nationality is, however, too narrow. It should be possible
for a person to choose the law of habitual residence at the time
the choice is made. We consider that it would also be acceptable
to extend the choice of available law to one with which the testator
has a genuine and concrete connection and which can be ascertained
with sufficient certainty.
Administration of the succession
and payment of tax
70. The law of succession has close links, and
overlaps, with other areas of law, particularly property law,
family law and tax. Any EU legislation determining which law is
to apply to a cross-border succession must, therefore, carefully
define the scope of the applicable law.
71. In our report on the Commission's Green Paper[21]
we expressed the opinion that it was necessary to limit the scope
of application of any EU legislation to "succession issues"
by excluding matters such as the administration of estates and
questions relating to the validity and operation of testamentary
trusts, matrimonial property law, and interests terminating on
death such as joint tenancies.
72. The scope of the proposal as a whole is set
out in Article 1 of the proposal and the scope of the provisions
relating to applicable law in Article 19. These provisions in
combination do exclude from the scope of the law to be applied
to cross-border successions some of the matters we previously
raised, but the proposal nevertheless includes within its scope
most aspects of the administration of a succession, albeit limited
in a way which would fit in with the UK's procedures. Thus, Article
21 permits a Member State in which property is located to subject
the administration of the succession to the appointment of personal
representatives. So for example, if a succession was governed
by French law, any dealing in the assets in the UK would require
the appointment of personal representatives, as is now the case.
This would assist in ensuring the proper distribution of the estate.
However, eligibility to be a personal representative would be
determined by French law as would their powers. This could mean
that a person would have to be accepted as a personal representative
even if they would not be qualified to act in that capacity under
the relevant UK law.
73. The law concerning what tax is payable and
how it is collected does not follow the law otherwise applicable
to the succession; and the tax legislation of the UK differs from
that of many other Member States. In the UK payment of Inheritance
Tax is the responsibility of the personal representatives who
have to satisfy HM Revenue and Customs that it has been paid or
accounted for before they are appointed to administer the succession.
Many other Member States do not have personal representatives
fulfilling this role and tax is the responsibility of the heirs,
who inherit property directly.
74. Revenue and customs matters are specifically
excluded from the scope of the proposal by Article 1. Article
21 permits a Member State to subject to prior payment of tax the
final transfer of property located in that State to those inheriting
it. This does not appear to achieve its objective of protecting
the collection of tax, because in the UK tax is collected or otherwise
accounted for before the formal appointment of the personal representatives.
For his part, Jonathan Faull claimed that the proposal was absolutely
neutral in tax matters (Q 116). That may be the intention
of the proposal but it has not been achieved as far as the collection
of tax is concerned.
75. Inclusion of the administration of estates
within the scope of the proposal would require consequential changes
to domestic law. For example, in England and Wales the personal
representatives who administer a succession are not at present
obliged to administer foreign assets. Were the proposal to be
adopted and apply to the United Kingdom they would have to do
so. This is likely to be a practical benefit, but the present
protection afforded to personal representatives against being
sued personally in respect of their distribution of the estate
provided they have previously advertised their intentions in the
London Gazette would become inappropriate. People residing outside
the UK with an interest in the succession are even less likely
to consult or have access to the London Gazette than those presently
residing in the UK.[22]
76. Limiting the scope of the proposal to
determining the law applicable to the issue of who is entitled
to what asset in any particular succession would result in simpler
legislation that would require fewer consequential changes to
the domestic law of Member States. It would be consistent with
the cautious approach we advocate. It would also permit the continuation
of important UK procedures for administering successions which
ensure the protection of the interests of creditors, beneficiaries
and HM Revenue and Customs.
Property rights and registration
of land
77. Article 1(3)(j) of the proposal excludes
from the matters that are covered by the proposal "the nature
of rights in rem relating to property and publicising these
rights".[23] The
Commission explains in its Explanatory Memorandum to the proposal
that this provision is intended to prevent the introduction into
a Member State of a right in relation to real property (essentially
land) which is not found in its law.[24]
It uses the example of a usufruct, which is the right of a person
to use and derive profit or benefit from property that belongs
to another; for example a farmer may give a right of usufruct
to a neighbour, thus enabling that neighbour to sow and reap the
harvest of that land. This right does not exist as part of the
substantive domestic law of England and Wales but does in other
Member States, for example France. The reference in the proposal
to publicising these rights includes the system of land registration
in the United Kingdom.
78. Professor Matthews did not agree that
the Commission's objective had been fully achieved. He interpreted
this provision as simply saying that the domestic law of England
and Wales, for example, did not need to introduce usufruct as
a property right. However, if the law of France were to apply
to the succession of land located in England, then one consequence
would be that a usufruct imposed under French law could, in fact,
attach to that land. However there would be no requirement in
the proposal to change the UK domestic Land Registry rules to
show that ownership of the property was subject to the usufruct
(Q 36). If those rules were not changed the result would
be that the usufruct would be effective but not publicised in
the Land Register. This could cause difficulties if the land is
then sold to a third party. At present the issue does not arise
because UK law applies to the succession of land situated in the
UK.
79. Another issue affecting the registration
of land arises in relation to clawback, and is discussed later
in this chapter.
80. The Institute of Chartered Accountants of
England and Wales (ICAEW) cited the example of French law, under
which minors can inherit and hold land, whereas under English
law minors are unable to hold land in their own right.[25]
Provision would have to be made for those cases where French law
applied to a succession and under that law a minor inherited land
in England (p 75).
81. The position as far as property other than
land is concerned is different. Professor Matthews provided
an example of a valuable painting located in England belonging
to a person who died domiciled in France. As matters stand, under
the law of England and Wales the law applying to the succession
of the painting is French. If that painting was given in the will
to A subject to a usufruct in favour of B in order to allow B
to hang the painting in his house for the rest of his life, any
dispute between A and B coming before an English court would be
resolved by the court applying French law and allowing B to take
possession of the painting for the rest of his life. Professor Matthews
did not interpret the proposal as seeking to change this (Q 36).
82. We support the principle that substantive
property rights should be interfered with as little as possible
by the proposal. We do not consider that the proposal meets this
requirement. As it stands the proposal would have the effect of
making land in the UK subject to novel property rights as a result
of applying the law of another Member State to a succession which
includes that land. This would be the expected consequence of
applying a single law to the succession of the whole of an estate,
including land. A further consequence would be that the system
of land registration would need adjustment to cater for this possibility.
Special succession regimes
83. In addition to the exceptions relating to
the administration of successions already mentioned in this chapter,
the proposal includes, in Article 22, other exceptions in respect
of "special succession regimes". The effect of this
Article would be that the law of the Member State in which certain
immoveable property, enterprises or other special categories of
property are located can be applied irrespective of the law which
would otherwise be applied, provided that these properties are
subject, in domestic law, to a special regime "on account
of their economic, family or social purpose" which applies
irrespective of the law governing succession. The Commission's
Explanatory Memorandum to the proposal[26]
cites the special regimes applicable in some Member States in
respect of family farms as an example of a special succession
regime. The intention appears to be to preserve aspects of succession
which Member States regard as culturally important.
84. These exceptions were characterised by Professor Matthews
as special pleading (Q 34). He pointed out that they would
result in a different law being applied to the succession of certain
land from that which would otherwise be applied under the proposal,
thus undermining the underlying objective of providing a single
law applicable to the whole of an estate (p 6). Richard Frimston
also considered these exceptions to be loosely worded and would
have preferred Article 22 to be omitted, but accepted that exceptions
might be needed in order to achieve agreement on the proposal
(QQ 69, 70).
85. The exceptions for special succession
regimes found in the proposal detract from the proposal's objective
of simplifying the handling of cross-border successions and should,
ideally, be removed. Whilst we accept that some exceptions may
be necessary to achieve agreement to the proposal, they should
be kept to the absolute minimum and the present drafting improved
to ensure that this is the case.
Clawback
86. This is the single most contentious issue
in the proposal for the UK. Clawback arises when a person benefiting
from a forced inheritance is able to make a claim for that inheritance
from the lifetime gifts made by the deceased. Clawback is intended
to stop the possibility of individuals evading the forced inheritance
rules by giving away their property during their lifetime. In
the law of England and Wales and that of Northern Ireland there
is no forced inheritance and therefore no clawback. Nor will the
courts entertain a claim for clawback even if they are applying
a law which includes it. In Scotland there is forced inheritance
in respect of moveable property, but the evidence to us was that
clawback either did not exist in the UK or was only very limited.[27]
Under Article 19(2)(j) of the proposal, clawback claims would
specifically be within the scope of the applicable law and therefore
would operate in the UK when the law being applied to a succession
provides for clawback.
87. The rules of clawback vary considerably between
Member States whose law includes it, as demonstrated by a study
commissioned from Professor Paisley, Professor of Commercial
Property Law at the University of Aberdeen, by the Ministry of
Justice and published as part of its consultation document.[28]
These differences in the operation of clawback would exacerbate
the difficulty in coping with clawback. They include the following:
· The period of time before death in which
a gift is made before it may be taken into account.
· The time within which a claim for clawback
may be made.
· Whether clawback can be claimed only against
the person receiving the gift or against anyone else to whom the
property has been passed or sold.
· Whether a claim can be made for the return
of the property itself or for monetary recompense.
88. An example of how clawback would operate
in an extreme case was given by Professor Matthews (Q 33)
and is outlined in Box 6.
BOX 6
An extreme example of clawback
A British national domiciled in, and entirely connected
with, England gives away a significant proportion of his property.
Forty years later he dies, having moved to France, having become
domiciled, bought property, married and raised a family there.
The forced inheritance claims and clawback will apply
to the gifts made when he was domiciled in England as far as French
law is concerned. They are liable to be returned to the estate
to meet these claims.
89. A variety of unwelcome consequences if clawback
were to operate in the UK have been raised. These are summarised
in Box 7.
BOX 7
The adverse effects of clawback in the
UK
· Those receiving gifts, including charitable
gifts and gifts made on marriage, would be uncertain whether the
property would be subject to clawback. This would either inhibit
the use of the gift or force them to seek forms of protection
such as insurance.
· Anyone whose property might possibly have
been acquired from a donee and subject to clawback, whether or
not they were aware of this fact, may feel the need to take out
protection against a clawback claim.
· It would be difficult to fix a price for
assets subject to clawback.
· Trusts and the use of insurance or pension
policies to effect estate planning would be undermined, even transfers
to offshore trustees if the property remains in the UK.
· Increasing legal costs would be incurred
in advising on property rights and the transfer of property.
· The various UK registers of property title
would be undermined because they would not provide a guarantee
as to the ownership of the property.
90. A particular problem could arise with registered
land, bearing in mind that clawback can, in some circumstances,
be exercised against specific property transferred from the original
donee to a third party. There would be two possible responses
to the possibility of clawback. Either the potential effect of
clawback could be excluded from the Land Registry's guarantee
of title, in which case those acquiring property were likely to
want to seek insurance against a clawback claim which might well
be difficult and expensive to obtain. Alternatively the guarantee
could remain and the Land Registry budget would bear the increased
costs of indemnifying those whose title to property becomes undermined
by a successful claim for clawback. This would inevitably push
up the fees which underpin the guarantee.[29]
91. Richard Frimston suggested that limited clawback
may have a benign effect. There would be a greater onus on a donee,
such as a charity, to ask responsible questions when receiving
a large gift (Q 81).
92. In England and Wales there are some circumstances
where gifts can be undone. That most frequently raised, and the
closest to clawback as found in this proposal, is the Inheritance
(Provision for Family and Dependants) Act 1975 which provides
a mechanism for family or dependants of a deceased to obtain reasonable
financial provision from the estate. Under this Act, a court can
set aside a gift if made within 6 years of death and made with
the intention of defeating a claim under the Act. Other examples
raised include legislation to protect creditors of the insolvent,
and adjustment of property in divorce proceedings. These are all,
however, of relatively limited impact, and practitioners know
how to advise their clients. Richard Frimston was of the opinion
that people in the UK were used to clawback in all sorts of ways
(Q 81). Professor Roger Kerridge, Professor of
Law at Bristol University, suggested that in most continental
jurisdictions the effect of clawback was much the same as the
anti-avoidance provisions which exist under the English Family
Provision legislation (p 79).
93. Additionally, some gifts (although not those
to charities) can give rise to Inheritance Tax if made up to seven
years before the death of the donor.
94. Lord Bach, Parliamentary Under Secretary
of State at the Ministry of Justice, indicated that many of the
respondents to the Ministry of Justice consultation cited clawback
as a reason for the UK not to opt in (Q 139). This was also
the strong flavour of the evidence presented to us. However, he
also indicated that many Member States would be reluctant to see
clawback removed from the proposal (Q 127). Given that clawback
forms part of the law of the majority of Member States and given
that processes having a similar effect can arise in the UK, we
considered whether clawback presents a particular problem to the
UK. We believe it does. As a number of our witnesses pointed out,
there is in the UK a legal culture of freedom for individuals
to dispose of their property as they wish; and there is a strong
UK cultural heritage of providing social support through gifts
to charity. To this may be added the important role played by
trusts in the UK. Trusts are not part of the law of many other
Member States and trustees frequently acquire property through
gifts; for example trusts set up to provide for a disabled person
or protecting the interests of a child could be vulnerable to
clawback.[30] Professor Matthews
attributed clawback as the main reason he considered that the
proposal would have detrimental effects on the City (Q 9).
Lord Bach expanded on this by indicating that clawback would have
a chilling effect on the functioning of trusts within the City
(Q 151).
95. Jonathan Faull appreciated that clawback
was a difficult and sensitive issue and one which would play a
large part in any UK decision to opt in. He indicated that the
Commission, having consulted with British lawyers, officials and
others, had crafted this aspect of the proposal to meet the support
of most Member States (Q 106).
96. It is undoubtedly the case that the impact
of clawback could be alleviated by permitting testators to choose
a law to apply to the whole of their estates which did not include
clawback, such as that of England and Wales. The proposal as it
stands only allows a choice of testator's nationality at the time
of death. This mechanism would therefore not be available to anyone
who did not have the nationality of a state whose law excluded
clawback. This option was regarded as inadequate by Professor Matthews
on a number of further grounds: it depended on the person concerned
realising that a change in their habitual residence to a State
with clawback laws had occurred, making a formal choice in a valid
will which was not thereafter revoked, and not changing nationality.
Furthermore he considered that the broad exceptions to the applicable
law contained in the proposal also undermined this choice (Q 33,
p 5). Lord Bach pointed out that only a minority of those
dying made wills (Q 139).
97. It would, of course, be possible to amend
the proposal so as to exclude or limit clawback. Richard Frimston
suggested that Member States with limited clawback may also be
reluctant to see clawback extended. He cited the case of Austria
whose law only takes into account gifts made two years before
the deceased's death (Q 61). The joint evidence of the Law
Society, STEP and the Notaries Society suggested some possible
ways of achieving this: limiting clawback to gifts made after
the choice of an applicable law, and limiting it to gifts made
with six years of the deceased's death (p 82). Professor Kerridge
considered the significant question to be whether clawback applied
only to the original donee or also to anyone who acquires the
property from the original donee (p 79). There are more possible
ways to limit clawback and a combination can be used.
98. We consider that the impact of the clawback
in the proposal as it stands would be detrimental to UK interests.
The Government should consult with accountants, lawyers, charities
and others who would be likely to be affected by it.
18 Re Collens deceased [1986] Ch 505. Back
19
For a recent example see Case C-523/07, A. Back
20
The Convention of 1 August 1989 on the Law Applicable to Succession
to the Estates of Deceased Persons. Back
21
EU Select Committee, 2nd Report (2007-2008): Green
Paper on Succession and Wills (HL Paper 12). Back
22
Evidence of Richard Frimston (Q 56). Back
23
A right in rem is a right which relates to property which
can be asserted against anyone who infringes it, in comparison
with a right in personam such a right under a contract
which can only be asserted against a specific person. Back
24
14722/09, COM (2009) 154, paragraph 4.1. Back
25
Minors are unable to hold a "legal estate" in land,
i.e. freehold or leasehold, in their own right but can do so as
beneficiaries of trusts. Back
26
14722/09, COM (2009) 154, paragraph 4.3. Back
27
Evidence of Professor Matthews (p 4) and Professor Crawford
and Dr Carruthers (p 65). Back
28
http://www.justice.gov.uk/consultations/docs/ec-succession-wills.pdf Back
29
Evidence of Oliver Parker (Q 155). Back
30
Joint evidence of the Law Society, STEP and the Notaries Society
(p 81). Back
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