Contributed by JOHN WESTWOOD
Managing Director, Blacktower Financial Management Limited
WITHIN THE last few years, Portugal has all but done away with inheritance tax (IHT), where assets are left to close relatives. However, other gifts, including those to unmarried partners, are subject to a transfer tax.
A large percentage of British expatriates living in Portugal are, whether they like it or not, still liable to UK IHT. To be precise, it is not they that are liable, but rather their estates or those that are due to inherit from them.
Even if you are now resident for tax purposes in Portugal, it is your “domicile” that decides whether you are liable for UK IHT. It is very difficult to change your domicile under UK law. In order to shed your UK domicile you must show that you have severed all connections with the UK and have no intention of returning.
What is also often forgotten is that UK IHT is charged on worldwide assets. Therefore, if you are UK domicile, any property or assets held in Portugal or elsewhere need to be included when calculating the potential liability.
The nil-rate band is 285,000 pounds sterling for the current tax year. Any amount in excess of this nil-rate band is potentially chargeable at 40 per cent. Therefore, an estate worth 600,000 pounds sterling will have a potential liability to IHT of 126,000 pounds sterling.
There are ways in which IHT liability can be reduced, which effectively involves making a gift of capital and/or income. However, for many people, the only major asset they have is their house and they need all their income, so they have little scope for making gifts.
In the past, it was possible to make gifts into trusts, so that after seven years, the capital was outside your estate for IHT purposes. However, proposals in this year’s budget made these trusts less attractive by imposing a 20 per cent tax on setting up the trust and a further charge of six per cent every 10 years. Nevertheless, it is only gifts in excess of 285,000 pounds sterling that will suffer these charges.
What this means is that gifts below the nil-rate band can be put into a flexible trust without the 20 per cent tax charge, the six per cent charge will only apply every 10 years on the trust’s assets that exceed the then nil-rate band.
It should be noted that these tax charges do not apply to absolute trusts where the settler has no benefit in the trust.
Some people find they cannot afford to gift away capital, especially if they need income, as they lose the right to benefit from it. However, there are schemes available whereby capital can be gifted and an income from the capital can still be retained by the donor.
Of course, trusts are not the only way to reduce your liability to UK IHT. Other means are by gifting away capital directly to others, such as children or grandchildren. Small gifts of up to 250 pounds sterling can be made to any number of people in the same tax year. The gift must be made outright and cannot be made to a trust. A one-off gift of 3,000 pounds sterling can also be made in any tax year.
One method of IHT planning that is often overlooked is to mitigate the liability by effecting a suitable life assurance policy, placed in an absolute trust for the benefit of your chosen beneficiaries. It is the premiums and not the death benefit that is treated as the gift. Therefore, provided the premiums fall within the 3,000 pounds sterling annual exemption limit there will be no IHT liability. Even if it is in excess of this level, the premiums may be treated as coming out of normal expenditure and therefore exempt.
One obvious problem with this method is insurability. Age and ill-health may make a suitable insurance policy expensive or even unavailable. If you have an existing life policy then it may be possible to utilise this with a suitable trust. Most life assurance companies can supply appropriate trust wordings without charge.
Coming back to permitted gifts, it is also possible for a parent to gift up to 5,000 pounds sterling to each of their children in consideration of marriage or civil partnership. Grandparents can give 2,500 pounds sterling and anyone can give 1,000 pounds sterling for the same purpose.
It is also possible to transfer assets between spouses and civil partners on a tax exempt basis as long as they are UK domiciled, otherwise a limit of 55,000 pounds sterling applies.
Careful planning of your will(s) is essential remembering that your total assets, onshore and offshore, are assessed for IHT purposes. As always, professional independent advice should be sought. You may need to review your current will(s) and trust arrangements. You should also seek advice as to whether you need a Portuguese will.
• John Westwood can be contacted by telephone on
289 417 267 or via e-mail at [email protected]