Is it safe to use a Deed of Variation abroad?

Deeds of Variation are incredibly tax efficient mechanisms to vary entitlements of an estate when the deceased is no longer alive. Whilst these are frequently used in the UK, whether for tax purposes or to redistribute the estate for other reasons, a question that we are often asked is whether foreign assets can be varied, for example a Spanish property?

In Spain, as it happens in other civil law jurisdictions, we do not have variations of estates as they are understood in England and Wales. The reason being that under civil law systems an estate is not administered, the estate is not a trust that requires administration, assets are transferred from the deceased to the new beneficiary whether under intestacy or under the terms of the Will.

In Spain, the acceptance of the estate is recorded in a notarial deed where the particulars of the deceased and beneficiaries are recorded, together with an inventory of the estate and the share in the estate allocated to each beneficiary. This Deed is then filed with the tax authorities for assessment and payment of Inheritance tax (filing is required even if no tax is due).

The distribution of an estate in Spain requires the active intervention of the beneficiaries who must agree how the assets are allocated, whether in accordance with the terms of the Will or under intestacy if there is no Will.

For example, if there are two beneficiaries who will inherit in equal shares, and the estate is made up of two properties of different value and bank accounts, the beneficiaries will have to agree who will get which property and the one inheriting the property of a lower value will have to be compensated with other assets. If this is not the case, the party inheriting more assets than what they are entitled to will be taxed accordingly.

If a beneficiary wishes to disclaim, he or she would execute a Deed of Disclaimer, their disclaimer will be dealt with under the terms of the will or intestacy. However, if a beneficiary disclaims in favour of someone else, then this will have tax repercussions as the original beneficiary has re-directed the asset to a beneficiary of his choice, triggering gift tax payable by the new beneficiary. The tax authorities in Spain used to (and in circumstances may still do) treat variations like this, a disclaimer in favour of someone else.

Are English Deeds of Variations valid in Spain?

The answer is that it depends and will require careful consideration.

From a tax perspective, the Spanish tax authorities in a recent binding resolution accepted their tax treatment in a case where a beneficiary who was a Spanish tax resident was liable to pay Spanish inheritance tax on the share inherited in the UK. The tax authorities confirmed that since the law governing the succession of the deceased was English law and Deeds of Variation are valid under English law, the variation should be accepted for inheritance tax purposes in Spain.

The key issue here is that the tax authorities have addressed this point on the basis of applicable law of the deceased, therefore you have to take this into account as a different law may govern the deceased’s estate.

The decision from the tax authorities only deals with taxation. A Notary or a Land Registrar, the “Gods” of the Spanish legal profession, may not accept a Deed of Variation due to various reasons. A recurring reason is the fact that there is a considerable change in the estate and this is recorded in a private document and not in a public deed. Private documents tend to be scrutinized to a high degree, and usually legal proceedings are required in order to have these enforced. The variation itself will not have direct access to the land registry or financial institution, it will be incorporated into the notarial deed of inheritance (if accepted by the notary).

Why is the input Notary and Land Registrar in Spain required?

The main reason is that they will play an active role in the transfer of assets from the deceased to the beneficiary, and if the asset is not transferred to the new beneficiary this can be a major problem. If the Variation is not accepted by the land registrar and the new beneficiary has paid inheritance tax, he would have effectively paid inheritance tax on an asset that is not his, therefore he or she would have to resort to the painful process of claiming a reimbursement from the Spanish tax authorities.

There are other instances, for example, where an estate is made of property overseas that has recently been sold by the beneficiaries, funds have been repatriated to the UK. The beneficiaries wish to vary the proceeds of the sale that are now in the UK, which raises the question of whether we can use a Deed of Variation.

At first glance, this looks perfectly normal as it is a UK asset now sitting in a client account in a firm of solicitors. However, this is a little bit more complicated than that, and many civil law countries like France, Italy or Spain to name a few, require that the deceased property be transferred to the beneficiaries so they can sell the property. Strictly speaking, the property is theirs and they have accepted it and they are the legal owners, so a variation is no longer possible.

In addition, this can create a series of tax problems. The tax authorities in the country where the property was located could potentially claim that the new beneficiary should have declared and paid the tax rather than the original beneficiary and, in some cases, there can be quite a significant amount of tax. A safe option would have been for the beneficiaries to gift the funds in the UK to the new beneficiaries.

What is the best advice?

Cross-border estates are not straightforward, and you will need specialist advice from the outset, otherwise there can be negative consequences that could have been avoided in the first place.