By Dean Parr, Partner, Blevins Franks.
https://www.blevinsfranks.com/news/article/Portugal-estate-planning-five-things-you-should-know
Get to know Portugal’s succession rules to help ensure your estate will pass to chosen heirs in the most tax-efficient way.
1. Family status determines who pays tax.
Instead of inheritance tax, Portugal charges a 10% ‘stamp duty’. This only applies to Portuguese assets – mostly real estate – passed on as an inheritance or lifetime gift, regardless of where the donor or beneficiary is resident.
While spouses and direct family are exempt from paying this tax, Portugal takes a fairly traditional view of the family. Partners who are neither married nor in a civil partnership will be liable for stamp duty on Portuguese assets inherited or gifted between each other, as will step-parents and step-children. However, after two years of living together, a couple can be considered married for tax purposes if they have informed the Portuguese authorities. Legally adopted children will also be recognised as direct family.
2. It is the recipient, not the donor who pays.
Unlike the UK, where tax is generally paid before an inheritance or gift changes hands, in Portugal tax is paid by the person receiving it.
However, as in the UK, ownership of an asset cannot be transferred until the tax is paid – you cannot sell the asset to pay the tax. With stamp duty due within six months after death, some heirs may find it a difficult tax to pay, particularly on higher-value inheritances.
Remember, stamp duty is charged on Portugal-based assets, irrespective of residency, so this could affect any heirs in the UK not directly related to you.
3. The law can determine who receives your legacy.
Portugal’s succession law imposes ‘forced heirship’. If you are a Portuguese resident, this means that a fixed portion of your estate will automatically pass to your direct family (according to the state’s definition of family). This affects not just Portuguese property, but all your worldwide assets, excluding non-Portuguese real estate.
As a result, your spouse, children (biological and adopted) and direct ascendants (parents and grandparents) could get a minimum of half your estate, regardless of whether that’s your intention.
However, it is possible to ensure your wishes are fulfilled by establishing specific arrangements to override this rule.
4. You can choose whether UK or Portuguese law applies to your estate.
Before August 2015, Portuguese law automatically applied the law of your nationality to your estate. For UK expatriates, this meant that the law of your ‘home’ country (England and Wales, Scotland or Northern Ireland) would come into force instead of Portuguese forced heirship.
Now, under the EU regulation, ‘Brussels IV’, the default is that the laws of your resident country apply. Although you still have the freedom to nominate the relevant UK law – and therefore override Portuguese forced heirship – you must now expressly state this in your will. If you have not updated your will since mid-2015, you should urgently review it to take these rules into account.
What about Brexit? Although it is an EU regulation, your eligibility to apply Brussels IV hasn’t changed. It applies to anyone who is resident and/or owns assets within participating countries in the bloc, regardless of nationality.
Note that Brussels IV only affects succession law – you cannot choose which country has taxing rights to your estate. That said, applying Brussels IV is complex and could have unwelcome tax implications, so make sure you explore all the available options to establish what would work best for you and your heirs.
5. You could still face UK inheritance tax.
Even after living in Portugal for years, UK nationals could still be considered UK domiciled by HM Revenue & Customs. This could result in UK inheritance taxes of 40% on your worldwide assets.
Domicile law is extremely complex so take specialist advice to establish your position and plan accordingly.
Ultimately, it is important to understand how Portuguese succession rules apply to your personal objectives and unique situation, and how they affect your UK liability. You should also consider how your legacy will be received by your heirs – an extra gift you can leave them is having their inheritances structured in a tax-efficient way to maximise their value.
With careful planning and specialist, cross-border advice, you can get peace of mind that you have the most suitable estate plan in place, for yourself and your chosen heirs.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
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