The EU's Regulation on Succession - European Union Committee Contents


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, ABack

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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