Till death us do part – matrimonial regimes, nuptial agreements and inheritance

The importance of inheritance planning cannot be underestimated – failure to consider the succession and tax consequences that arise on the death of a spouse can lead to significant financial implications, at a time when emotions could already be running at an all-time high. Particularly in situations where there is a large amount of familial wealth, the earlier this is considered, the better, and marriage (and the election or not of a matrimonial regime, or creation of a bespoke nuptial agreement) is a good time to take stock and ensure your family is protected for the future.

In this blog, Sophie and Colleen are joined by Flora Cassoudesalle, avocate at bwg associés in Paris.

Firstly, we take a look at the French approach, and the interplay between matrimonial regimes, inheritance and forced heirship.

Matrimonial regimes and the concept of forced heirship

We start by noting one key consideration in respect of the French approach: the French matrimonial regime is not just relevant to divorce – it covers first and foremost a marriage ending by the death of one of the spouses. Even more importantly, the provisions of the chosen regime take effect before any will or intestacy provisions are considered.

Under French law, the choice of a matrimonial regime has repercussions on the way in which the spouses’ property is distributed among their heirs upon their death. Hence:

1. If the spouses are married under a communauté réduite aux acquets regime, which is the default regime in France, the surviving spouse retains their sole/personal assets, and also receives half of the joint/common assets.
2. If the spouses are married under a universal community of assets regime (“communauté universelle”), all of the assets of both spouses are pooled, whether acquired previously or during the marriage. At the time of inheritance, all joint/common assets are shared equally: the first half going to the surviving spouse and the second half constituting the inheritance intended to be shared between the deceased spouse’s heirs. Usually, when spouses choose this matrimonial regime, they include a clause which confirms that the entirety of their assets are to pass to the surviving spouse. In this case, the inheritance is dealt with at the time of the second spouse’s death, which may be a source of conflict if the first deceased had children from a previous union.
3. If the spouses are married under a separation of property regime (“separation de biens”), assets acquired by the spouses before and during the marriage remain their sole/personal assets, except if they jointly bought these assets, in which case they are considered as joint/common assets. At the time of one of the spouses’ death, the surviving spouse will only be able to claim part of the deceased's personal assets, as heir.

Therefore, the key issue to determine is whether the surviving spouse has claims on the deceased’s sole/personal assets or share of the common assets given the forced heirship rules.

The concept of forced heirship is a legal mechanism which protects legal heirs from being disinherited. Legal heirs are entitled to a minimum share of the estate, which is called the réserve héréditaire. The share is calculated according to the number of children and, if none, the surviving spouse is entitled to one quarter of the deceased’s estate, unless the deceased allowed him/her the usufruct on the whole estate in a will.

The portion of the inheritance that is not protected is called the quotité disponible. The deceased can freely dispose of it through gifts to whoever they choose.

The actual division of assets will depend on whether the deceased had children, and whether they made a will:

• If the deceased had no children, the surviving spouse is considered as a legal heir (héritier réservataire), and therefore cannot be disinherited;
• If the deceased had at least one child:
  • If they did not make a will: the inheritance is divided between the surviving spouse and the children, depending on whether the children were born from both spouses or only from the deceased;
  • If they made a will: the surviving spouse may be disinherited if the deceased made provision to that extent.

This concept of forced heirship is relevant if French law applies to the deceased’s inheritance, the rules surrounding which are numerous and can be complex. However, this mechanism of forced heirship is moderated in international cases. Where in such cases it is agreed that foreign laws shall apply, French courts cannot disregard foreign laws that do not have this concept of forced heirship unless its application places the heir in a situation of “economic precarity and need”.

The English approach to inheritance

Inheritance comes into play in a variety of ways under English law.

Family law considerations - nuptial agreements

Nuptial agreements are bespoke (albeit over the years a number of provisions have been created that one would now expect to see as standard), and so the treatment of inheritance within a nuptial agreement can be as light-touch or detailed as a couple want.  We see inheritance arising within a nuptial agreement most commonly in two specific ways:

1. The treatment of assets already inherited or which may be the subject of future inheritance, in the context of a separation. The impact of nuptial agreements on divorce is the subject of our next blog, but inherited assets are capable of being ring-fenced, with the other spouse agreeing not to claim any share in the event of a future separation or divorce.
2. In relation to a potential claim for “reasonable financial provision” under the Inheritance (Provision for Family and Dependants) Act 1975 (known as the Inheritance Act). Nuptial agreements can include clauses designed to limit any future claim under this Act. Whilst it is impossible to completely oust the court’s jurisdiction, such clauses will certainly be drawn to the court’s attention if a later application is made and can be very persuasive.

What if I do not have a nuptial agreement?

As mentioned above, a spouse or former spouse can apply to the court under the Inheritance Act in situations where the other spouse has died and has not made “reasonable financial provision” in his or her will. The definition of “reasonable financial provision” is more generous for a spouse than other potential applicants.

There are many factors that a court will take into account when considering such an application, including age, length of marriage and contributions made to the family. Importantly, the court will also consider what sort of provision the applicant might have expected to receive if, on the day their spouse died, the marriage had been terminated by divorce as opposed to death. It is therefore in this sort of situation where a nuptial agreement or matrimonial regime becomes an important consideration.

Practically speaking, if a couple have been married in France (and have therefore chosen a matrimonial regime or elected for the default) it may be worth considering whether those provisions are suitable or whether a bespoke postnuptial agreement is required to ensure that inherited assets are dealt with in a different way.

Private client considerations
 

English inheritance law

In England and Wales, there is no matrimonial regime to need to consider first. Unlike French forced heirship rules, there is freedom of testamentary disposition subject to someone being able to potentially bring a claim against an estate for financial provision under The Inheritance (Provision for Family and Dependants) Act 1975.

If there is no Will in place, the Intestacy Rules will determine how someone’s estate will pass.  Broadly, if the deceased was married/in a civil partnership and has no children, their spouse/civil partner will inherit everything. If the deceased has children, the spouse/civil partner will inherit the first £322,000 along with any of their personal possessions. Anything over £322,000 will then be divided with the spouse/civil partner receiving 50% of this and the children entitled to divide the other 50% between them. If the deceased was not married/in a civil partnership but has children, the whole estate will go to them.  If there are no children, then the estate will pass to the deceased’s parents, siblings or other blood relatives in a set order.

English private international law

Under English Private International Law, immovable property (i.e. land) in England and Wales is governed by English inheritance law whereas foreign immovable assets are governed by the law in that jurisdiction. Worldwide movable assets are governed by the law of the deceased’s last domicile (this is an English law / UK tax law concept discussed more below). Therefore, where governing foreign law is agreed to be French, the relevant French matrimonial regime will apply to such property.

Domicile and UK Inheritance Tax (IHT)

Under English common law, everyone has one domicile at a particular time. There are three types:

1. Domicile of Origin – your father’s domicile at your birth if your parents were married, otherwise your mother’s.
2. Domicile of Dependency – generally applies to children under 16 if their father (or mother if appropriate) acquires a new domicile.
3. Domicile of Choice – a domicile chosen by an individual after the age of 16. The two key elements are one’s physical presence in the jurisdiction with an intention to remain there permanently or indefinitely.

However, if you have been resident in the UK for 15 out of the last 20 tax years you are “deemed domiciled” in the UK for IHT purposes.

Domicile is relevant for IHT:

1. Individuals domiciled in the UK are subject to IHT on their worldwide assets.
2. Individuals not domiciled in the UK are subject to IHT on their UK assets only.

Transfers between spouses during lifetime or upon death usually qualify for the full IHT spouse exemption. Where spouses have different domiciles for IHT purposes, the UK IHT spouse exemption is restricted. Gifts from the UK domiciled spouse or civil partner to the non-UK domiciled spouse or civil partner are exempt up to £325,000. However, there is no limit on the exemption for gifts between spouses with any other combination of domiciles.

Non-UK domiciled spouses and civil partners can elect to be treated as UK domiciled for IHT purposes only to make all gifts between spouses exempt from IHT either during the lifetime of or within 2 years after the death of the UK-domiciled spouse. The effect of the election is to make all gifts between spouses exempt from IHT.

Every individual has a tax-free allowance known as the Nil Rate Band (NRB) in which IHT is charged at 0%. The NRB is currently £325,000, subject to any lifetime gifts made in the seven years before death. IHT at 40% will be charged on the value over the NRB.

A surviving spouse/civil partner can inherit the unused percentage of their deceased spouse/civil partner’s NRB. On the second death, the deceased’s estate will be able to use the survivor’s NRB in addition to any unused proportion of the NRB from the first death if they claim this within two years of the survivor’s death. Assets held outside the UK by a spouse/civil partner not domiciled or deemed domiciled in the UK are not taken into account when calculating the available unused NRB. 

The Residence Nil Rate Band (RNRB) of £175,000 can be claimed in addition to the NRB.  The RNRB applies where you own a qualifying residence and gift it to your children (or any other direct descendants) on your death.  

The UK and France may both charge an inheritance tax on the same assets. Thankfully, however there is a double tax treaty dating from 1963 which mitigates the worst of this. 

The UK Government has announced that these IHT rules are to change – we are currently in a period of consultation before these are updated, but it is a safe bet that the number of years of UK residency before an international individual becomes deemed domiciled will reduce significantly – four years is the expected number.

Conclusion

Inheritance is a complex area and the above is a brief overview of some of the key points that a couple should reflect on. It is advisable to seek legal advice early on so that any necessary protections can be put in place in all relevant jurisdictions.

further information

If you have any questions regarding this blog, please contact our Anglo-French team.

about the authors

Sophie Voelcker is a partner in Kingsley Napley's Private Client team. Sophie focuses on advice to UK resident and/or domiciled clients regarding wealth structuring, estate planning and trusts, with a particular interest in any cross-border taxation and succession issues for clients with international assets or who have relocated abroad. Sophie also has experience providing such advice in the context of matrimonial disputes and pre-nuptial agreements.

Colleen Hall qualified as an Associate in the Family team in 2017.  She is a fluent French speaker, and advises on all aspects of family law issues including cross border issues and cases with an international element, in particular cases with French nationals or assets in France, all stages of divorce, dissolution and judicial separation proceedings, including where proceedings have been issued in more than one jurisdiction.

Flora Cassoudesalle is an associate at BWG Law.