If you have moved to Portugal, you should have taken steps to ensure that your finances and tax affairs are all set up for your life here. But have you done the same with your estate planning?
While Portugal is relatively straightforward when it comes to inheritance taxes – only charging 10% ‘stamp duty’ on Portuguese property passed between non-direct family members – succession laws work very differently to the UK. If you are not prepared for this, your legacy might not be distributed as you intended.
How does Portuguese succession law work?
Based on Napoleonic law, Portuguese succession rules are designed to keep property within the bloodline. If you are resident in Portugal, ‘forced heirship’ rules may automatically allocate a minimum proportion of your worldwide estate to specific heirs – even if your will states otherwise.
For example, if you do not have any children or grandchildren, 50% of your estate would be reserved for your spouse (66% if your parents are still alive). Where you have a spouse and descendants, usually 66% is divided equally between them. However, if you have a spouse and two or more descendants, the spouse must receive at least 25% with the remainder being divided equally amongst the other heirs. In the case of having descendants but no spouse, they receive 50% if an only child, otherwise they share 66% of your estate.
Note that Portugal takes a very traditional view of the family, so stepchildren and unmarried partners may not be considered direct family – for either succession law purposes or stamp duty exemptions.
How can you use ‘Brussels IV’?
A recent EU law, known as Brussels IV or the European Succession Regulation, offers the option to override local succession laws by applying the law of your nationality to your estate. This means you could avoid forced heirship and distribute your legacy according to your written wishes under the law of your ‘home’ country, such as England and Wales, Scotland or Northern Ireland.
This regulation also introduced a standard European grant of probate – the ‘European certificate of succession’. This can significantly reduce time and cost by giving the administrators of an estate the authority to transfer and dispose of assets across the EU without the need for multiple grants of probate.
The new default position
It is crucial to note that things were different before Brussels IV came into effect on August 17, 2015. Then, the law of nationality would automatically apply in Portugal to the estate of residents. Now, you have to expressly state in your will (or similar legal document) that you want to apply UK rules to your estate on death. So if you have not updated your will since mid-2015, you should urgently review it to ensure it takes the new rules into account.
However, take care as Brussels IV is a relatively new and complex development that could present unwelcome tax implications.
For example, holding a UK will and nominating that your estate comes under British jurisdiction could build a case for determining that you are UK-domiciled. Even if you have lived away from the UK for many years, this could potentially bring you into the firing line for UK inheritance tax on your worldwide estate at 40%. However, applying Brussels IV in this way is unlikely to be enough on its own to determine UK domicile status.
Make sure you understand all the consequences and explore all the options available to achieve your objectives and establish what would actually work best for you and your heirs.
What about after Brexit?
The good news is that, although Brussels IV is an EU regulation, it applies to all nationalities resident or owning assets within participating countries in the bloc, including non-EU citizens. As a result, it is irrelevant that the UK is actually one of the few EU member states to have opted out of Brussels IV (along with Ireland and Denmark). So even after Brexit, you can still choose the relevant British law to define how your estate is passed on.
Note that whatever you decide to do under Brussels IV, this only affects succession law – it has no effect on liability for inheritance taxes in either country. The situation remains as before – if you have assets in more than one country and different inheritance tax regimes apply, the double tax treaty or the national tax rules will determine where and how succession tax is paid.
Ultimately, there may be other, more suitable ways to achieve your estate planning objectives than using Brussels IV. For peace of mind, take specialist, cross-border advice to establish the most appropriate and tax-efficient estate plan for your family.
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 are advised to seek personalised advice.
By Adrian Hook
|| [email protected]
Adrian Hook is a Partner of Blevins Franks and has been providing holistic financial planning advice to UK nationals in the Algarve since 2007. Adrian is professionally qualified, holding the Diploma for Financial Advisers.