This article was written by Nicola Neal and Jessica Flowerdew from Brodies.
We live in a multi-jurisdictional world where cross border marriages, international employment and the acquisition of foreign property are becoming increasingly common. However, whilst it is becoming more common for people to have international aspects to their private lives, this has the potential to complicate the administration of their estate on death. This article considers some of the more common issues encountered by Private Client solicitors when dealing with an estate where the deceased was either (1) domiciled in Scotland but held foreign assets; or (2) domiciled abroad but with assets in Scotland.
The death of a loved one inevitably creates a sense of loss for the survivors which can be overwhelming. At such a difficult time, there will also likely be many practical issues to address following a death, including dealing with the deceased’s assets and distributing these in accordance with the will, or, if there is no will, in accordance with the rules of the country in which the deceased was domiciled at their death.
Matters can be further complicated where the deceased died in Scotland but with assets located abroad or vice versa. This can create practical issues in relation to, for example, payment of inheritance tax (IHT) in the UK, or ingathering assets located abroad. It is worth noting that the law of succession in Scotland is separate and distinct from the law of succession in other parts of the UK. Where the deceased had links to Scotland as well as foreign connections, the following points should be considered:
When multiple jurisdictions are involved in an estate, questions will inevitably be raised about where the deceased was domiciled at the date of death. Therefore, when administering an estate with foreign connections, the first step will be to address this issue. In terms of Scots law, an individual’s domicile will determine (amongst other things) the tax and succession regime applicable on their death and is therefore of crucial importance.
In the UK, three types of domicile are recognised: domicile of origin, domicile of choice and domicile of dependence:
1.1 Domicile of origin
The starting point for domicile is that a person will have a domicile of origin, which they acquire at birth. In most cases, an individual will have the same domicile as their parents, but this is not always the case in Scotland owing to section 22 of the Family Law (Scotland) Act 2006, mentioned below (the “2006 Act”).
A person could therefore have a domicile of origin in a country with which they have very little connection. An individual never loses their domicile of origin but it can be superseded by a domicile of choice or dependence. However, if either of these ‘falls away’ the domicile of origin will revive.
1.2 Domicile of choice
Most people will retain their domicile of origin throughout their life. However, it is possible for a person over the age of 16, and with full mental capacity, to acquire a new domicile of choice in another country if they meet the following tests:
- They must be physically present in the new country; and
- They must have a fixed and settled intention to give up their previous domicile and live in the new country permanently.
If a person’s domicile of choice is abandoned for any reason (i.e. because of a move to a different country), their domicile of origin automatically revives to fill the gap. The domicile of origin then remains their domicile until they have a fixed and settled intention to acquire another domicile of choice.
Whether or not an individual has acquired a new domicile of choice will involve a subjective assessment of their intention and circumstances. The standard of proof required to establish a domicile of choice is extremely high, although there is some debate about whether the standard of proof is ‘beyond reasonable doubt’, or whether the lower standard of ‘balance of probabilities’ applies.
1.3 Domicile of dependence
Domicile of dependence affects individuals that are legally dependant on another as they automatically acquire that person’s domicile.
For children, the position in Scotland is regulated by section 22 of the 2006 Act. Where a child’s parents are domiciled in the same country as each other and that child shares a home with one or both of them, he or she will be domiciled in the same country as his or her parents. Otherwise, the child will be domiciled in the country with which the child has the closest ties.
Up until the end of 1973, a married woman acquired the domicile of her husband upon marriage. This rule was changed by the Domicile and Matrimonial Proceedings Act 1973 and a married woman now has the same rights with regards to domicile as any other person. That said, where a married woman previously acquired her husband’s domicile because she was married before 1973, she will keep that domicile unless she abandons it or acquires a new domicile of choice.
1.4 Deemed domicile
Before 6 April 2017, deemed domicile applied for inheritance tax (IHT) purposes only. However from 6 April 2017, the deemed domicile rules now also apply to income tax and capital gains tax (CGT). Broadly, an individual who has been UK resident for at least 15 of the 20 tax years immediately preceding the current tax year will be deemed UK domiciled for IHT, income tax and CGT purposes.
For IHT purposes only, the individual must also have been resident in the UK for at least one of the four preceding tax years. The effect of being deemed domiciled in the UK is that the scope of IHT extends from UK assets to all assets worldwide.
It is also worth noting that section 178 of the Finance Act 2013 increased the inter-spouse IHT exemption for lifetime transfers and transfers on death from a UK domiciled spouse/civil partner to a non-UK domiciled spouse/civil partner from £55,000 to the prevailing nil rate band (£325,000). The UK Government introduced a further ‘main residence’ nil rate band for relevant transfers on death on or after 6 April 2017.
2. Forced heirship in Scotland: legal rights
The question of specific domicile will also determine the succession to an estate on death. For those domiciled in Scotland at death, legal rights will need to be considered and addressed by the executors. Scots succession law is quite different from the position in England and the issue of whether someone is Scottish or English domiciled may also require to be considered.
In Scots law, the concept of testamentary freedom provides that every individual should have the right to decide how their estate should be divided on their death. However, this is subject to one important qualification which is that, even if a testator makes no provision for his spouse or children in a will, they will still have ‘legal rights’.
Legal rights are not a right of succession, but rather, they constitute a debt on the testator’s estate and they must be addressed before the residue is distributed. Legal rights apply automatically and they apply where the testator dies with and without a will. However, those with a legal rights entitlement may elect to discharge them.
Legal rights can only be claimed against the testator’s worldwide net moveable estate (i.e. everything aside from land, buildings and mortgages), after certain debts have been deducted. Significantly, moveable estate would also include an interest in a partnership, including any land or buildings owned by that partnership, unless the partnership agreement stipulates otherwise. The extent of the legal rights will ultimately depend on whether the testator is survived by a spouse and children, but it will either amount to one third or one half of the net moveable estate.
The Scottish Government has expressed the need to modernise this approach to succession in its recent consultation. It has proposed that a spouse or civil-partner should inherit the whole estate if there are no surviving children (and vice versa). It has also recommended that Scotland should look to find possible solutions from other jurisdictions to determine an appropriate division of the estate when there are surviving children and a spouse or civil partnership.
Legal rights must be claimed within 20 years of the deceased’s death. Where the deceased dies domiciled in Scotland, his executors should be cautious of legal rights, as if the estate is distributed and a legal rights claim subsequently emerges within the 20 year period, the executors could find themselves personally liable to satisfy the legal rights.
3. Cohabitant claims on death
Domicile is also relevant in the context of claims by cohabitants on death. Section 29 of the 2006 Act gives surviving cohabitants in Scotland the right to apply to the Scottish court for financial provision once their relationship has ended, either by separation or upon death, provided that the following conditions are satisfied:
- immediately before the death, the deceased was domiciled in Scotland;
- the deceased died intestate (i.e. without a valid will);
- immediately before the death, the couple must have been cohabiting together as if they were husband and wife or civil partners; and
- the surviving cohabitant must apply to the court for financial provision within six months of the death.
Section 29 may, therefore, be relevant where the deceased died domiciled in Scotland. However, it is worth noting that the case of Kerr v. Mangan  CSIH 69 held that succession to heritable property located outside of Scotland will be devolved in accordance with the lex situs (i.e. the country where the property is located), and will not, therefore, be subject to a section 29 claim.
There have been many criticisms in recent years to these provisions and in response; the Scottish Government has recently released a consultation proposing various changes to the process for determining a cohabitant’s rights upon the death of their partnerIt has also been recommended that there should be an extension to 12 months from the date of death. Further to this, it is proposed that courts should have discretion to allow late applications to be made “on cause shown”.
Obtaining grant of confirmation
3.1 Grant of confirmation
Where the deceased died domiciled abroad but had assets located in Scotland, it may be necessary for the executors to apply to the Scottish court for grant of confirmation (the Scottish equivalent of probate) before the assets can be remitted to the executors and sold or transferred to the beneficiaries of the deceased’s estate. Confirmation gives the executors authority to deal with the deceased’s Scottish assets.
The precise procedure for obtaining confirmation to estate in Scotland in cases of foreign domicile will depend on whether the deceased died testate or intestate. In either case, specific documents will be required and any document in a foreign language must be accompanied by a certified translation.
To obtain grant of confirmation where the deceased died domiciled outside of Scotland, the executors must apply to the Sheriff Clerk of Lothian and Borders in Edinburgh using form C1 (the application for confirmation), which incorporates an inventory of the deceased’s Scottish estate. The executors must also lodge either the full IHT return form IHT400, or the shorter ‘Return of Estate Information’ form C5.
Where the executor is resident overseas, it may be practical for him/her to execute a power of attorney, authorising a person resident in Scotland (i.e. a solicitor) to sign the paperwork, as this could expedite matters.
3.2 Resealing as an alternative to confirmation
As an alternative to obtaining confirmation, where the deceased died domiciled in the country to which the Colonial Probates Act 1892 (the 1892 Act) applies, and a grant has been issued in that country, the executor can apply to the Edinburgh Sheriff Court to have that grant ‘re-sealed’, to administer the Scottish estate.
However, whilst re-sealing remains competent, in modern day practice, it is rarely used and confirmation is preferred, not least because if the original grant of confirmation is misplaced, a duplicate grant or certificates of confirmation can be obtained fairly easily, whereas if a re-sealed grant is lost, the executor must apply to the Court of Session (Scotland’s supreme civil court), to prove the tenor of the missing document. Re-sealing may also be unavailable if the original executors have changed.
4. Foreign wills
As a reminder, for those either domiciled in Scotland but with foreign heritable estate, or domiciled abroad but with heritable estate in Scotland, advice should be taken regarding the need to have a valid will in place in the country in which the foreign property is located. If multiple wills are at play, care should be taken to ensure that the wills are compatible and, crucially, that a subsequent will does not revoke an earlier will.
5. EU Succession Regulation
The EU Regulation No.650/2012 (“Succession Regulation”) came into force in 2015. While the UK is not a party to this, the Succession Regulation will affect Scottish domiciled individuals with assets in those member states that did sign up to it. Under the Succession Regulation, the estate of an individual devolves in accordance with the law of the country in which they are habitually resident, unless that individual has specifically elected (by making a choice of law election) for their estate to devolve in accordance with the law of their nationality. However, if a UK resident has a property abroad, the law of Scotland is that the law of the country in which the property is situated (the lex situs) will apply. This means that a Scottish Court would send the matter back to the relevant member state to decide. There is a question mark as to whether that country would then apply their own law, or the law of the relevant part of the UK, as the Succession Regulation does not expressly state which should apply in this situation. It will take a decision from the European Court of Justice to provide clarity. This area of law is particularly complex and tailored professional advice is always required.
The EU Succession Regulation will continue to have an impact on those with assets across many other EU member states even after Brexit.
This article highlights only some of the issues that private client practitioners may need to consider when dealing with cross-border estates and foreign domicilaries. Where multiple jurisdictions are involved, a collaborative approach between professional advisors will undoubtedly expedite the administration process. As ever, where clients have foreign connections, obtaining professional advice at any early stage will be key to simplifying matters on their death.