If you live in Portugal or have Portuguese assets, make sure your estate planning is in order. While the local equivalent of inheritance tax is relatively straightforward, succession law here is very different to the UK. If you do not 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. Not everyone pays taxes on inheritances and gifts
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/beneficiary is resident. Spouses and direct family, however, are exempt from paying this tax.
While this is good news, note that Portugal takes a very traditional view of the family. Partners who are neither married nor in a civil partnership will pay 10% tax 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, so long as they have informed the Portuguese authorities. Legally adopted children will also be treated as direct family for stamp duty purposes.
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 will 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. This affects not just Portuguese property, but all your worldwide assets (other than 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. Your default position has recently changed
Before August 2015, Portuguese law automatically applied the law of your nationality to your estate. For UK expatriates, this meant you did not need to take any action to ensure your estate was distributed as you wished – in line with appropriate UK law – rather than according to Portuguese forced heirship rules.
Now, under the ‘Brussels IV’ EU regulation, the default is that the laws of your resident country apply. So if you are Portuguese resident, your spouse and direct family could be on track to automatically inherit at least half of your estate.
You still have the freedom to nominate UK law, but you must now state this in your will. Any wills pre-dating mid-2015 are unlikely to take this into account so should be reviewed. Take care, however, as applying Brussels IV is complex and could present unwelcome tax implications. Make sure you explore all the options available to achieve your objectives.
5. You could still face UK inheritance tax
Even if you have lived in Portugal for years, as a UK national you could still be considered UK-domiciled by HM Revenue & Customs. This could put you in the firing line for UK inheritance tax 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; an individual is advised to seek personalised advice.
By Dan Henderson
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.