Estate planning in Portugal – five things you should know
By Matthew Krystman, Partner, Blevins Franks
Estate planning in Portugal may not be as complex as in some European countries, but if you live in Portugal or have Portuguese assets you still need to review and adjust your succession arrangements to suit the local regime.Ensure your estate will be distributed according to your wishes and as tax efficiently as possible.
Start your estate planning review by getting to know some key features of the Portuguese system and how it might affect you and your family.
Portugal succession law imposes ‘forced heirship’
The first step in estate planning, whether for Portugal or anywhere, is deciding who to leave your assets to and in what amounts.
Portugal, however, imposes restrictions on how freely you can distribute your wealth. If you are a Portuguese resident, the succession law determines that a fixed portion of your estate will automatically pass to your direct family (according to the state’s definition of family). This applies to your worldwide assets, with the exception of 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.
You can choose whether UK or Portuguese law applies to your estate
Since the EU succession regulation ‘Brussels IV’ came into force in 2015, the succession law of your country of residence will apply by default on your death.
Foreign nationals, however, can elect for the succession law of their country of nationality to apply instead – therefore overriding Portuguese forced heirship. You must expressly state this in your will or similar legal document, your family cannot opt for this after your death.
What about Brexit? Although it is an EU regulation, your eligibility to apply Brussels IV has not changed since the UK left the EU. It applies to anyone who is resident and/or owns assets within participating countries in the bloc, regardless of EU 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 explore all the available options to establish what would work best for you and your heirs.
Family status determines who pays Portuguese inheritance tax
Another key elements of estate planning is understanding and reducing succession taxes. Portugal does not impose an ‘inheritance tax’ as we know it, but does apply a 10% ‘stamp duty’ when assets are passed on death or as a lifetime gift.
There are two key rules/exemptions:
Spouses, descendants (children, grandchildren) and ascendants (parents) are exempt from this tax.
The tax only applies to Portuguese assets – mostly real estate – regardless of where the donor or beneficiary is resident. Assets in the UK and elsewhere are exempt.
Note that stepchildren do not count as direct family and so will pay this tax (unless legally adopted). Likewise partners who are neither married nor in a civil partnership could also be liable, though if you inform the Portuguese authorities after two years of living together you should be considered married for tax purposes.
Each recipient pays the inheritance tax
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.
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.
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 (above the thresholds). This is in addition to Portuguese stamp duty, but there are measures to avoid double taxation on the same asset.
Domicile law is extremely complex so take specialist advice to establish your position and plan accordingly.
Portugal estate planning to make life easier for your heirs
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 a straightforward and tax-efficient inheritance process. Take action now so your assets can be passed to them as quickly and easily as possible – with some investment structures for example, the funds can be transferred to your nominated beneficiaries without the need for probate – and with as little tax as possible.
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.