The consequences of making a Will with assets in Italy and the UK
Monica Cervellini details the considerations when advising UK residents who hold assets in Italy and the UK
Each individual who approaches you to draft a Will on their behalf will have their own unique financial circumstances, time constraints and personal wishes. As such, ensuring they receive advice tailored to their situation is crucial.
The applicable law of succession
The EU Succession Regulation 650/2012 (Brussels IV) was adopted by most EU member states (except for the UK, Ireland and Denmark) and came into force on 17 August 2015. The purpose of the EU Succession Regulation was to simplify the international succession of individuals with assets in different jurisdictions, by applying one inheritance/succession law to an individual’s estate, on death.
Therefore, the Succession Regulation ensures that, for individuals who die on or after 17 August 2015, with assets in an EU member state that has adopted the regulation (eg, Italy), the law which shall be applicable to their worldwide estate on death will be the law of the country of their last habitual residence, unless they specify, in their Will, that they wish for the law of their nationality to apply.
Although the United Kingdom and Ireland did not opt-in to the Succession Regulation, its provisions may well apply to an estate where a British national dies leaving assets in Italy.
Application of the ‘law of last habitual residence’
The concept of ‘habitual residence’ refers to a country where an individual lives regularly, is planning on staying there indefinitely and feels most connected with.
If your client is a UK citizen, ‘habitually resident’ in the UK, with assets in Italy and in the UK, and a choice of law is not made in their Will, the law of their last ‘habitual residence,’ such as the law of England and Wales, will apply to their succession (assuming that, on death, the testator did not have a much stronger connection with the law of another country), with the following consequences:
- English law will still apply to the individual’s movable assets in Italy, eg, Italian bank accounts, investments etc.
- For any immovable assets located in Italy, eg, land or properties, English law will apply the ‘renvoi,’ consequently transferring the authority to administer the succession of those assets to Italian law. Any immovable assets would, therefore, be governed by the law of the country where they are located (lex rei sitae).
Choice of law (professio juris)
As the choice of law in English Wills can have significant impact on cross-border matters, it is recommended that a choice of law clause be included in a British national’s Will, so that the testator may choose the law of their nationality as the law to govern the succession as a whole.
Therefore, barring exceptional circumstances, by opting for English law to apply to your client’s succession on death, the succession law of England and Wales will apply to the deceased’s worldwide estate. This can have several advantages, eg, the application of one law to your client’s succession, greater freedom of testamentary dispositions, bypassing Italian forced heirship rules, should your client not wish to pass a certain percentage of the estate to certain family members, and giving more powers to the appointed executor(s).
The ‘renvoi’ can be considered an exception to the unitary approach dictated by the EU Succession Regulation. With no choice of law, should your client pass away ‘habitually resident’ in the UK, their immovable assets would be subject to the law of succession in the country where those assets are located. Therefore, if a piece of land or a property are located in Italy, Italian law would apply to the succession of those assets (the principle of lex rei sitae).
On the other hand, the renvoi can be avoided if the deceased’s law of nationality is explicitly chosen in their Will, as specified in Article 34 of the EU Succession Regulation. As a result, if your client is a British national, they can apply the law of their nationality to the entire succession, regardless of the nature of the assets and the country where they are located. Thus, immovable assets located in Italy would no longer be governed by lex rei sitae, but would be subject to the English law of succession and distributed accordingly.
Appointment of executors
The choice of law will also give appointed executors more autonomy and flexibility when dealing with the administration of the estate. Under English law, executors appointed in the Will are required to comply with the deceased’s wishes and, unless the Will states otherwise, the executors are free to manage, sell, or invest the testator’s assets.
In Italy, the executors (esecutori testamentari) are also appointed by the testator in their Will, but, conversely, executors acting under Italian law, have more limited powers and must obtain court approval before taking certain actions. They are not allowed to carry out any acts which involve disposing of the beneficiaries’ patrimonial assets (atti di straordinaria amministrazione) without prior consent from the court. An annual report must also be submitted for the court’s approval.
Italian Wills do not need to include a clause regarding the appointment of executors as the heirs have automatic powers of administration concerning the deceased’s estate. The appointment of one or more than one executor is only recommended in specific circumstances, such as when there is a complicated administration of the estate, numerous dispositions in the Will, or potential clashes between the appointed beneficiaries.
As such, while the role of executors in the UK and Italy is similar, the powers and responsibilities vary depending on the law applicable to the succession.
Forced heirship rules
In accordance with Article 536 of the Italian Civil Code, Italian law provides legal protection for specific individuals related to the deceased. These individuals (eredi legittimi) are entitled by law to a percentage of the deceased’s estate regardless of the content of the deceased’s Will. The percentage the eredi legittimi is entitled to will depend on the relationship of those beneficiaries with the deceased. For example, if the deceased passes away leaving a spouse and two children, the deceased’s spouse will be entitled to a quarter of the estate, and the deceased’s children will be entitled to the remaining half of the estate, leaving the testator with the freedom to leave only a quarter to whoever they wish.
- When a choice of law is made by a British national in their Will, this bypasses the requirement of the forced heirship rules, therefore the assets in Italy will follow the English law of succession. As such, this can minimise any risks of possible successful claims from ‘excluded’ heirs (subject to specific exceptions, in accordance with the Inheritance (Provision for Family and Dependants) Act 1975).
- If no choice of law clause is included in the Will, and the law of the ‘last habitual residence’ applies (assuming the testator passes away ‘habitually resident’ in the UK), the immovable assets located in Italy will be subject to Italian law and, therefore, the forced heirship rules. If there is a Will, the testator’s wishes will still be respected, however if a claim is legitimately raised by an ‘excluded beneficiary,’ it is more likely to be successful. This can lead to additional costs for the beneficiaries to distribute the shares in accordance with Italian Law and can cause delays in the administration of the estate.
- Unlike the UK where a claim against the testator’s Will can only be raised within six months, a violation of the Italian forced heirship rules can be raised by an ‘excluded beneficiary,’ under Italian law, within 10 years from the death date. This greatly limits any disposal of the deceased’s assets, such as the sale of inherited property in Italy, unless adequate steps are taken to protect third parties and other beneficiaries from any legal action.
Inheritance tax in Italy
As the EU Succession Regulation does not allow an individual to opt for a specific tax regime to apply to their succession (the applicable inheritance taxes will depend on each individual’s tax domicile), it is important to determine how your client’s estate will be taxed on death. Indeed, since the definition of domicile varies from country to country, an individual may well be tax domiciled in more than one jurisdiction, leading to the heirs being subject to taxation, on the same assets, in more than one country.
If your client were to be considered tax domiciled in the UK at the time of their death, inheritance taxes will still be due on their assets located in Italy, the value of which will be set out in the declaration of succession (dichiarazione di successione). This document will state the value of the deceased’s Italian assets, who the beneficiaries are and their relation to the deceased, their shares in the deceased’s Italian assets, any lifetime gifts made by the deceased, the legatees etc.
The applicable tax rate and corresponding threshold will depend on the relationship of the deceased with the beneficiaries. For example, transferring the Italian assets to the spouse or the children can have preferable tax treatment than devolving those assets to other beneficiaries, such as siblings or people not related to the deceased.
Inheritance taxes are calculated on the net value of the assets after deducting the applicable thresholds. The rates and thresholds are:
- four per cent on the amount exceeding the threshold of €1m for the spouse and children or any descendants;
- six per cent on the amount exceeding €100,000 for siblings;
- eight per cent for unrelated beneficiaries, including any companies and trusts, with no applicable threshold.
If the deceased’s Italian assets include property or land, there will be additional applicable taxes on top of the inheritance taxes. These include the ‘imposte ipotecarie’ and ‘imposte catastali,’ which amount to two per cent and one per cent, respectively, of the cadastral value of any immoveable property owned at death. If the Italian Revenue Agency considers the deceased to be tax domiciled in Italy at the date of death, then Italian taxation will apply to the deceased’s worldwide estate (including assets in the UK).
The use of trusts in English Wills is a very common way to protect the deceased’s assets and/or mitigate inheritance taxes. However, the benefit that a Will trust can have in the UK may not have the desired outcome in Italy. Italian financial institutions and tax authorities are not familiar with the concept of trusts. The Italian Revenue Agency defines trusts as entities per se and requires that trusts are subject to official registration (with the corresponding registration fees). As such, the administration of Italian succession of a Will trust can delay the process and lead to unnecessary costs, and potentially higher tax consequences.
If your client intends to set up a Will trust, it should be taken into account that the Italian Revenue Agency may demand that the assets included in the trust are transferred to the trustees, or even to the trust itself, rather than to the appointed beneficiaries, leading to unwanted consequences. The Italian Revenue Agency may consider the trust, or the trustees, as beneficiaries of the trust property and tax them accordingly by applying the highest inheritance tax rate of eight per cent.
Furthermore, if Italian immovable assets have been transferred into a trust, there will be additional applicable taxes (such as the aforementioned imposta ipotecaria and catastale). The Italian Revenue Agency may also investigate further or consider future enquiries against the deceased’s beneficiaries leading to extra work and costs. As a result, the use of trusts and its consequences abroad must be subject to careful consideration.
For individuals with assets in the UK and the EU, the changing laws and regulations can lead to a host of unexpected or unwanted consequences when executing a Will. It is, therefore, crucial to take a multi-faceted approach when advising clients to minimise the risk of delays, complications or complaints, and ensure that their wishes are fulfilled accordingly.
Monica Cervellini is a dual-qualified solicitor and an Italian avvocato at Buckles Solicitors