Ensuring a tax-efficient legacy for your family
You have probably spent time on your financial planning, to provide a secure future for yourself throughout retirement. Have you done the same for your future heirs? Do you have strategic estate planning in place to ensure the right money goes to the right people at the right time, with as little tax as possible? A good start is asking some key questions.
Who will receive your assets and wealth?
Unlike the UK, where you are free to leave your estate to whomever you choose, Portugal’s ‘forced heirship’ succession law dictates how assets are passed on. For Portuguese residents, this means that your spouse and direct family could automatically inherit at least half of your worldwide estate, even if you wish to pass wealth to other beneficiaries.
Prior to 2015, the default position was that the law of your home country applied to your estate, which worked well for UK expatriates. Now, under the ‘Brussels IV’ EU regulation, Portuguese forced heirship automatically applies.
You can, however, choose to override forced heirship by specifically nominating the relevant UK law in your will. You need to do this in advance; it is not something your heirs can arrange after your death. Take cross-border advice before doing this though, to understand all the pros and cons and establish what works best for your family.
What will your legacy be spent on and when?
You might want to establish some control over when your heirs receive your legacy and how they can use it, without incurring an expensive and lengthy probate process.
It is possible to structure your capital in such a way as to provide tax-efficient benefits for you during your lifetime, while also proving control and certainty after you are gone. This could enable you, for example, to delay the timing of an inheritance until your heirs reach an age where they are likely to be financially mature. Ask your adviser about suitable solutions for your objectives and family circumstances.
Who will pay tax on your estate?
Unlike the UK, where inheritance tax is usually paid by the estate before changing hands, in Portugal each recipient pays the liability.
The Portuguese equivalent of inheritance tax – stamp duty – is relatively minimal in both scope and cost. It only applies to assets like real estate, vehicles and shares located in Portugal and passed on as an inheritance or lifetime gift. Spouses and direct ascendants/descendants are not liable, but gifts to anyone else attract a fixed rate of 10%, wherever they are resident.
Those who have remarried or have more complex families should note that Portugal’s fairly traditional view of the family means unmarried partners, step-parents and step-children could face stamp duty on Portuguese assets inherited/gifted between each other. However, exemptions are available through measures like adoption and proof of cohabitation.
As in Britain, inherited assets cannot change hands until the tax is paid, so some heirs may find it difficult to pay within the six-month deadline on higher-value inheritances.
Will you attract UK inheritance tax?
As UK inheritance tax liability is determined by domicile rather than residence – and domicile is an incredibly ‘sticky’ concept – it continues to affect many Britons living here. Those captured face 40% UK inheritance tax on their worldwide estate, as well as Portuguese stamp duty on assets located here (although measures are available to prevent double taxation on the same asset).
Domicile law is highly complex so take specialist advice to establish your position and plan accordingly.
What about your own needs?
Although you want the best for your heirs, make sure you can enjoy your wealth in the meantime, and that it is available when you need it. The trick is to ensure the right money passes to the right hands at the right time, while still meeting your retirement objectives. Look for Portuguese-compliant opportunities that let you make the most of what you have, providing tax advantages during your lifetime as well as for your heirs in the future.
Estate planning is a complex area, especially when you have to consider the rules of two countries and how they interact. Take specialist, personalised advice for peace of mind that you have the most suitable, tax-efficient approach in place, for you and your chosen heirs for years to come.
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.