Five things you should know about estate planning in Portugal

If you live in Portugal or have Portuguese assets, you need to make sure your estate planning is in order. While the local inheritance tax regime is relatively straightforward, succession law here is vastly different to the UK’s. Unless you understand how the rules work, your estate may not be distributed in line with your wishes or could attract more taxation than it needs to.

A good start is getting to know the key features of the Portuguese system and how they might affect you.

1. Family status determines who pays tax
Instead of inheritance or succession tax, Portugal charges a fixed ‘stamp duty’ of 10%. This applies only to Portuguese assets – namely 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, note that Portugal takes quite a 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 estate
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. It is important to understand the EU succession regulation
Before August 2015, Portuguese law automatically applied the law of your nationality to your estate. For British 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 rules.

Now, under the EU regulation ‘Brussels IV’, the default is that the laws of your resident country apply. You still have the freedom to nominate the relevant UK law – even after Brexit – but you must now expressly state this in your will or similar legal document. If you have not updated your will since mid-2015, you should urgently review it to ensure it takes these rules into account. Note that this only affects succession law – you cannot choose which country has taxing rights to your estate.

However, applying Brussels IV is complex and could have unwelcome implications. Make sure you explore all the available options to establish what would actually 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, in addition to Portuguese stamp duty (although measures are available to avoid double taxation on the same asset).

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, you can get peace of mind that you have the most suitable approach 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.

By Dan Henderson
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Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.