Estate planning 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
The first step in estate planning is deciding who to leave your assets to and in what amounts.
Portugal imposes restrictions on how freely you can distribute your wealth. The succession law determines that a fixed portion of your estate will automatically pass to your direct family. This applies to your worldwide assets, with the exception of non-Portuguese real estate.
Your spouse, children (biological and adopted) and direct ascendants (parents and grandparents) could get a minimum of half your estate, regardless of your intentions.
However, it is possible to ensure your wishes are fulfilled by establishing specific arrangements to override this rule.
EU succession regulation
Under the EU succession regulation, Brussels IV, 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 – 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.
This EU regulation applies to anyone who is resident and/or owns assets within participating countries in the bloc, regardless of EU nationality.
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 unexpected tax implications, so explore your options to establish what would work best for you and your heirs.
Portugal stamp duty
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 outside Portugal are exempt.
One potential exemption is crypto assets, which may be liable to the 10% tax even if from overseas, though the normal familial exemptions apply.
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.
Beneficiaries pay the 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. With stamp duty due within six months after death, some heirs may find it a difficult tax to pay, particularly on higher-value inheritances.
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.
It may be possible to establish a domicile of choice in Portugal, but great care must be taken. Domicile law is extremely complex so take specialist advice to establish your position and plan accordingly.
Regardless of domicile, any assets you have in the UK will always be assessed for UK inheritance tax.
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.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
Sharon Farrell is a Partner of Blevins Franks in Portugal.