Five things you should know about estate planning in Portugal

If you live in Portugal or have Portuguese assets, don’t overlook getting your estate planning 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 some key features of the Portuguese system and how it might affect you.

1. Family status determines who pays tax
Instead of inheritance tax, Portugal charges a 10% ‘stamp duty’. This only applies 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 a fairly 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 not directly related to you.

3. The law can determine who receives your legacy
Portugal’s succession law imposes ‘forced heirship’. If you are a Portuguese resident, this means a fixed portion of your estate will automatically pass to your direct family (according to the state’s definition of family). This not only affects Portuguese property, but all 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. You can choose whether UK or Portuguese law applies to your estate
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. Although you still have the freedom to nominate the relevant UK law – and therefore override Portuguese forced heirship – 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 take these rules into account.

What about Brexit? Although it is an EU regulation, your eligibility to apply Brussels IV won’t change. It applies to anyone who is resident and/or owns assets within participating countries in the bloc, regardless of nationality or whether you are an EU citizen.

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.

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 situation and goals, 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 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.

By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).