It is likely you have put thought into your financial planning to set you up for the life you want. Have you made financial arrangements for your future heirs with careful estate planning? A good start is asking some key questions.
Who will receive your legacy?
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, regardless of your intentions.
This is a relatively new concern – before August 2015, the default position was that the law of your home country applied to your estate. Now, under the ‘Brussels IV’ EU regulation, Portuguese forced heirship automatically applies unless you specifically nominate the relevant UK law in your will.
While your ability to override forced heirship in this way will not change post-Brexit, doing so could trigger unwelcome tax implications, so take care to explore your options.
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 particular 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 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. 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.
By Adrian Hook
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).