Considering succession for non-UK residents purchasing UK residential property

This article will consider how to ensure ownership of UK residential real estate owned by non-UK residents passes in accordance with the owner's wishes on death

28 June 2022

In the first article in this series 'Tax considerations for non-UK residents purchasing UK residential property', we considered the key UK taxes that non-UK residents should consider when purchasing, owning and disposing of UK residential real estate. While the question of UK tax is (rightly) a key consideration when acquiring UK residential real estate, consideration of succession planning issues should also be a priority.

In this article we will consider the succession rules that apply to residential real estate in England and Wales owned by non-UK residents and the steps that should be taken to ensure that in the event of the death of the owner, the property passes in accordance with the deceased’s wishes.

Which law will apply

In our previous article we discussed how, due to tax implications, where property is being purchased for personal occupation by a non-UK resident and their family, personal ownership is likely to be the preferred option, rather than ownership through a trust and/or company structure.

Under English law, succession to immoveable property (i.e. real estate) is governed by the law of the jurisdiction in which the property is situated. Therefore, if a non-UK resident individual personally owns real estate in England or Wales, the succession laws which will apply to that property on the owner’s death will be the laws of England and Wales.

If the non-UK resident owns the real estate through a company, English law provides that succession to the shares in the company will be governed by the laws of the place where the individual is domiciled. This has been reaffirmed in the recent BVI case (heard in the Eastern Caribbean Court of Appeal) of Al Thani v Al Thani, which involved a dispute about the validity of certain Wills that the deceased had made. The deceased (a member of the Qatari Royal family) owned shares in a BVI company, which in turn owned real estate in London. The deceased was domiciled in Qatar and it was found that Qatari law governed succession to the shares in the company and Qatari law was the relevant law to apply when considering the validity of the Wills. The court confirmed that shares in a BVI company are moveable property and so succession is governed by the law of domicile (as opposed to immoveable property i.e. real estate, where succession is governed by the laws of the country where the property is situated).

Co-owners

If English real estate is owned by more than one person, it is necessary to determine how it is owned, in order to understand what will happen in the event of the death of a co-owner. Under English law, two types of ownership are possible:

1. Joint tenancy; and

2. Tenancy in Common.

Where individuals own property as joint tenants, on the death of one co-owner the rule of survivorship applies and the deceased’s interest in the property will automatically pass to the surviving co-owners. Succession to the deceased’s interest in the property will not be governed by their Will, nor will the intestacy laws apply if there is no valid Will. 

In contrast, for tenants in common, the surviving co-owners do not automatically inherit. Instead, the deceased’s share in the property will pass in accordance with their Will and if they do not leave a Will then it will pass under English intestacy laws.

Example – Joint Tenants & Tenants in Common

Neil and Mila are married and own Glass Manor, London. They are both neither UK resident nor domiciled. They own Glass Manor as joint tenants. Neil passes away and his entire interest in Glass Manor passes to Mila due to the rule of survivorship. This is outside the terms of any Will that Neil may have written and the intestacy rules cannot apply. 

If Neil and Mila had held their interest in Glass Manor as tenants in common, on Neil’s death succession to his interest in Glass Manor would have been governed by his Will and in the absence of a Will, English intestacy rules would apply.

Intestacy under English law

Assuming that English situated real estate is personally owned (and if there are co-owners they own as tenants in common), if the owner dies without a valid Will governing succession to the asset, then English intestacy laws would apply. The result of this is that the property may not pass to whom the deceased would have wanted. 

Example – Survived by Spouse and Children

Milly and Adam are married. They are both neither UK resident nor UK domiciled. They hold the beneficial interest in Cherry Tree House as tenants in common in equal shares. They have two adult children. Adam passes away and does not leave a Will dealing with his English estate. Succession to Adam’s English immoveable assets (i.e. Cherry Tree House) will be governed by the English intestacy rules.

Milly will receive a statutory legacy of £270,000 free of tax, as well as any costs. This statutory legacy may have to be met by transferring an interest in Cherry Tree House equivalent to £270,000 to Milly. However, for the purposes of simplicity for this example, we will assume that the statutory legacy will be met from other funds. 

Cherry Tree House would fall into the residue of Adam’s estate and Milly would receive half of the residue with the remaining half share split between Adam’s children.

1. Milly receives ½ of Adam’s 50 per cent share in the property (1/4); and

2. The property is held on statutory trusts for the children. As they are both over the age of 18, each receives ¼ of the 50 per cent share in the property (1/8 each).

3. Milly retains her original 50 per cent share in the property.

This split of the property is likely to result in inheritance tax being payable on the part of the property inherited by the children (assuming that the share of the property that the children receive is worth more than £325,000 and that spouse exemption applies to the part being inherited by Milly). 

The end result will be that Milly owns 75 per cent of Cherry Tree House and the children own 12.5 per cent each. This may well not be in accordance with Adam’s wishes, if he had intended Milly to become the sole owner of the property. 

In the situation where someone is not survived by a spouse, then their children will take the property equally between them. Again, this may not be in line with the deceased’s wishes, perhaps if they have children from multiple relationships and intend the property to be inherited only by the children from one particular relationship. Or, if the deceased wishes his estate to pass in accordance with Sharia law, an equal division between all children may not be in line with what the deceased would want. 

Making a Will

As can be seen from the above example, the absence of a valid Will may result in property not passing in accordance with the deceased’s wishes, nor in the most effective way from an inheritance tax perspective. As a result, the well advised individual owning real estate in the UK should always put in place a valid Will to govern succession to that asset.

The terms of the Will would, of course, depend on the wishes of the individual and their particular circumstances. However, the following may be useful points to consider:

1. If the owner is married or in a civil partnership and both the owner and their spouse/civil partner are not domiciled in the UK, spouse exemption from inheritance tax should apply. This means that if the deceased leaves their entire UK estate to their spouse/civil partner, there should be no inheritance tax liability on the first death. On the death of the spouse/civil partner there is likely to be an inheritance tax liability at that time, if the property is still owned (and assuming they have not remarried).

2. The owner may not wish to leave the property outright to their spouse, for example if they wish to leave their assets in a Sharia compliant way, or if they have other family members (maybe children from a prior relationship) that they wish to benefit. There are various potential solutions that could be used here, including:

1. Outright gifts to various family members. This may lead to fragmented ownership, making management of the property difficult, particularly if there are numerous people who wish to live in it, or visit it. This solution is also likely to result in inheritance tax liabilities on shares that do not pass to a surviving spouse or civil partner.

2. A gift into a discretionary trust. The property could remain in trust with the trustees deciding who is entitled to use it from amongst a class of beneficiaries. Or the trustees could distribute shares in the property to various beneficiaries, as indicated by the deceased in a letter of wishes. This option has the disadvantage of inheritance tax being charged on death and further charges if the property remains in the trust.

3. Creating a life interest trust for a surviving spouse/civil partner. This would secure inheritance tax spouse exemption and would allow the spouse/civil partner to live in the property, or receive any income generated from it. The capital interest in the property could then be held for other family members. This can provide a solution for those wanting succession in accordance with Sharia law, whilst at the same time mitigating inheritance tax. 

In conclusion, in order the ensure that any UK real estate passes in accordance with the owner’s wishes on death, a Will governing succession to the asset should always be put in place. The terms of that Will would depend on the particular circumstances and advice should be taken to ensure that the owner’s wishes are achieved in relation to what may be a very valuable asset.

Key contact

Emma Heelis-Adams

Emma Heelis-Adams Partner

  • Private Client Services
  • International Tax
  • HNW and UHNW Individuals

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