Brexit... Private client and tax

Individuals with international interests are deeply concerned about the effect Brexit will have on their personal and business dealings as well as on the overall planning of their lives.

Are they worrying in vain or are there steps they can take now to mitigate what is coming? These are the key questions we touch on below.

If you have any questions about this topic or other Brexit related topics, please get in touch.

Will Brexit impact my estate planning?

On 4 July 2012, the EU promoted the European Regulation 650 of 2012, known as ‘Brussels IV’, or the ‘European Succession Regulation’, or ‘ESR’, which came into force on 16 August 2015. The main benefit of the ESR is to introduce a single set of rules concerning the law applicable to the succession of an individual who has connections with an EU Member State. Under the ESR, the law applicable to the succession, unless otherwise provided, is that of the deceased’s habitual residence at the time of death and this is to apply to the whole of the succession. Additionally, the ESR allows a person to choose, either expressly or implicitly, the law of his nationality as the law to govern his succession as a whole.

The UK has ‘opted out’ of the ESR (and so have Denmark and Ireland), which means that the UK has already declared itself as not bound by its terms. Looking at the mechanics of how a European Regulation enters the ranks of the national legislation, the effect of the UK ‘opting out’ is twofold:

(1) on the one hand, the ESR does not form part automatically of the UK legal system, ie it is neither directly applicable nor directly effective in the UK; and
(2) rulings of the European Court of Justice on the ESR do not have, even now, supremacy over inconsistent provisions of UK national law.

In other words, the UK is, already pre-Brexit, apparently ‘immune’ from the effects of the ESR.

But this is not all there is to say, as there are other aspects of the ESR that we must take into account. The main one is that the ESR has been written so as to have universal application. This is a known concept in the international private law environment, be it European or conventional. It means that if the rules of the ESR are applicable to a specific matter, they will be universally applicable and enforceable, and not just limited to those who are part of a European Member State.

The fact that the ESR has universal application allows British nationals to exploit its rules to elect for national law to apply to property situated in an EU country, for example to their Italian villa. It also means that if a UK national is habitually resident in an EU country, and no election for applicable law is made in his/her Will, the domestic laws of that country, including its forced heirship rules, will apply to his/her whole succession, irrespective of where the assets are located.

In either case, the ESR will apply, directly or indirectly, to the succession of a UK individual with assets, or generally connections, with an EU Member State. It will also continue to apply to an Italian national who relocates with his family to the UK, by virtue of its combination with the English conflict of law rules. We recommend taking special advice on this issue.

Do we need re-arrange our asset and estate planning relating to matrimonial property in the light of Brexit?

Like international successions, international matrimonial property regimes have created conflict of laws issues for years. Following the entry into force of the ESR, in June 2016, the European Union adopted a regulation to resolve this conflict: Council Regulation (EU) 2016/1103 of 24 June 2016 implementing enhanced cooperation in the area of jurisdiction, applicable law and the recognition and enforcement of decisions in matters of matrimonial property regimes (‘MPRR’).

MPRR concerns the property regimes of international marriages (or civil law partnerships under a sister Regulation) and it is aimed at helping couples manage their property on a daily basis and to divide it in case of divorce or of the death of one member. MPRR was adopted by 18 EU countries; crucially, but unsurprisingly, the UK was not one of them.

MPRR intends to provide international marriages with legal certainty and reduce the costs of legal proceedings as couples will know which country’s courts should deal with matters concerning their property and which national law should apply to resolve such matters. It will also facilitate the recognition and enforcement of decisions on property matters given in another EU country. As a couple’s property must be divided in case of divorce or death, it will also facilitate the application of EU rules on cross-border divorces and successions. This Regulation applies as from 29 January 2019.

The MPRR follows a similar structure as the ESR, and in fact the two are meant to be considered together. It introduces rules to determine the law applicable to the matrimonial property regime of the marriage and allows couples to change the statutory law and the regime applicable.

In a similar fashion to the ESR, the UK opted out of the MPRR too. Similarly though, this Regulation applies universally too, and therefore may continue to apply to individuals who are either nationals of, resident or married in, or are relocating to, countries where the MMPR applies. Like the ESR, the MPRR cannot therefore be disregarded. This is another area where specialist advice is highly recommended.

Internationally mobile individuals: what does Brexit mean?

The Withdrawal Agreement guarantees to both British and EU citizens broadly the same rights as they had before Brexit for a certain period, including the freedom to move to another EU country [Click here for more information about UK immigration. The move of many European citizens to obtain a British passport has been steady and well reported. Perhaps less reported has been the acceleration of the decision-process of many British nationals with a ‘place in the sun’ to relocate to a European country. As many countries, such as Italy, have implemented favourable tax regimes to entice long-term non-residents to move to their countries, or return there after a relatively long period of absence, why wait for retirement?

Brexit will not have any impact on the existing network of double taxation agreements between the UK and the other EU countries, which will remain in place subject to any future changes that may be agreed upon. However, it is important to remember that if an agreement is not concluded, once the UK becomes a non-EU Member State, generally speaking the EU fundamental freedoms and thus all tax benefits linked to a connection to the EU or the EEA will cease to apply.

This will have a substantial impact on individuals who have been, and will continue to be, conducting their life across European borders, under a number of aspects. For example, EU social security regulations will no longer apply; charitable giving, which is currently treated beneficially across the European countries thanks to the protection afforded by the ‘non-discrimination’ principle, may be impacted where the donor or the donee are on British soil; certain aspects of the taxation of trusts may change dramatically in certain countries, where trusts have been ‘tolerated’ only thanks to the general EU non-discrimination principle.

Whilst therefore Brexit may have not had an immediate impact on international private clients as such, the ripple effect that it will have on their planning and affairs will certainly be felt, and must be considered carefully.

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