Introduction
Whether a family home or a second home, it is not uncommon for non-UK domiciled individuals to co-own UK property with, for example, their spouse. Where such property is co-owned as joint tenants, a potential issue may arise where the right of survivorship (which provides for the property to pass automatically to the surviving co-owner on death), risks infringing forced heirship rights under the domestic law of the deceased’s domicile of origin.
The English law joint tenancy
There are two ways to co-own land under English law: as ‘joint tenants’ or ‘tenants in common’. The concept of joint tenancy is unique to common law jurisdictions such as, for instance, England and Wales, United States of America and Bahamas. Each joint owner owns an undivided share in the whole of the asset, rather than a distinct fractional share. On the death of a joint tenant, the property falls outside the scope of the deceased’s distributable estate (although it remains within his chargeable estate for tax purposes), meaning the joint tenant has no control over the devolution of their interest in the property (for example, by making provision under their Will). Instead, the deceased’s share in the property passes automatically by survivorship to the surviving joint tenant/s. Such arrangements are most common between spouses, providing continuity and tax efficient passage of property on death, outside of the probate procedure. This is because, under current UK tax legislation, the transfer to the surviving spouse is exempt for inheritance tax purposes (assuming no domicile mismatch) and, as the absolute owner, the surviving spouse has an immediate right to occupy the property from the date of death without a grant of probate.
On the other hand, under a tenancy in common arrangement, each co-owner owns a distinct and separate share in the property. On the death of a tenant, ownership of their share does not automatically transfer to the surviving tenant/s but, instead, passes to the beneficiaries of the deceased’s estate in accordance with their Will (where in place) or the intestacy rules.
Most civil law jurisdictions do not distinguish between co-ownership of land in this way and the deceased’s share in a property will not pass automatically to the surviving co-owner/s. Some civil law countries, such as France, have a similar regime to a joint tenancy, ‘tontine’, whereby a clause can be inserted into the Transfer Deed to ensure that the property automatically becomes the sole property of the survivor on the first death. The tontine clause is a well-known option to avoid forced heirship rules in France, but can the joint tenancy provide an English equivalent?
Joint tenancies and continental forced heirships
While under English law, individuals have complete freedom of disposition over their estate, in many civil law countries certain family members have a mandatory right to a portion of the estate, a ‘reserved share’ (la quota di legittima in Italian), which they can enforce at law. When calculating the reserved share of a deceased whose estate is governed by, for instance Italian law, the total estate of the deceased will be valued, wherever situate. If an heir, such as a child, has been left less than their reserved share, they may have the right to make a claim against other beneficiaries to recover the shortfall from the available estate assets.
But what happens in respect of a UK property when a joint tenant spouse, who is domiciled under English general law in a country which recognises forced heirships, for instance Italy, dies leaving children? Is the property an ‘available’ asset for disgruntled children (perhaps from a previous marriage) to go after or is it ring-fenced by virtue of the survivorship rules under English law?
Looking at an Italian national who is domiciled in Italy (under English general law) and who dies resident in the UK with assets in the UK as a matter of English conflict of law rules, their movable assets (bank account, chattels, shares in UK incorporated companies) will be dealt with under Italian succession law (being the law of the deceased’s domicile). However, the devolution of their immovable assets in the UK will be governed by the lex rei sitae (i.e., English succession law).
Depending on the value of the deceased’s remaining assets and any provisions made under their Will (if in place), an issue may arise if the deceased had, for instance, children in Italy from a previous marriage and the other assets (i.e., the assets not jointly held with the second spouse) are not sufficient to meet the children’s ‘reserved share’ in the estate under Italian succession law. This may be the case where the deceased’s share in the UK property was the most valuable asset in their estate. The question then arises as to whether the children can claim a right to the deceased’s interest in the property, or a share of it, in satisfaction of the shortcoming in their reserved share. Or does the English law rule of survivorship prevail over the Italian forced heirship rights, and thus effectively remove the property from the pool of assets available to meet any such claims?
In addition to and perhaps, in advance of, considering the succession law position, proper thought needs to be given to the property law position. This is because the property law survivorship rules involve proprietary rights, rather than succession rights. A similar situation arises with continental matrimonial property regimes, where, on the death of a spouse, the regime dictates what assets actually fall into the deceased spouse’s estate and therefore needs to be considered in advance of applying succession law principles.
While the issue appears yet to be tested by the Courts of either jurisdiction, it is important to remind continental clients that holding UK situated assets as joint tenants may not always be the most appropriate route if they would like their share to go, at some point, to their children. A better option may be to purchase the property as tenants in common (or to sever a joint tenancy which is already in place) and put in place an appropriate Will to deal with the share in the property in a way that can, in so far as possible, achieve tax efficiencies on death, while ring-fencing it for the benefit of the children. By contrast, a joint tenancy may be preferable or advisable where the holders wish to ensure that the property passes automatically to the surviving spouse without the complexity of probate and possibly protected against forced heirship claims by children from a previous marriage. Either way, the key message is that the decision to buy as joint tenants or tenants in common should not be taken lightly given the overarching implications, and appropriate advice should be sought.
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