By Gavin Scott
We are lucky here in Portugal compared to some other European countries, since the local inheritance tax regime is relatively benign. However, many British expatriates remain liable to UK inheritance tax, where the tax take has been rising over recent years. If you are a British national it is important to understand how this tax, and any changes, will affect your heirs.
The Portuguese version, known as ‘stamp duty’, only applies to Portuguese situated assets, and your spouse and children are exempt. For other heirs the tax rate is 10%.
In the UK, inheritance tax is charged on your worldwide estate if you are UK domiciled (UK assets only, if not). The tax rate is 40%, above a tax free threshold. Your spouse is generally exempt (but not always) but your children are not.
Crucially, it is based on domicile rather than residence. Domicile is a much more permanent concept than residence and does not change simply because you left the UK. The basic rule is that you are domiciled in the country you regard as your homeland. Many British expatriates remain liable for UK inheritance tax even if they have lived abroad for many years.
It is an unpopular tax, with many people viewing it as double taxation since they have already paid tax on the assets and income over the years. Many argue that it unfairly punishes families who want to leave their hard earned wealth to their children and grandchildren.
You can however take steps to protect your family from this tax.
The tax rate of 40% has remained unchanged since the late 1980s. There is a lower rate of 36%, but this only applies if you leave a minimum of 10% of your estate to qualifying charities.
The tax free threshold, or ‘nil rate band’, does change, and affects how many families are caught in the inheritance tax net and how much tax is paid.
The threshold used to rise each year with inflation, but has been frozen at £325,000 since 2009 as part of austerity measures.
Last December Chancellor George Osborne said he would increase it to £329,000 from 2015, but this was overturned in his March Budget when he announced it would remain frozen until at least 2018.
We have warned that freezing the threshold is effectively a tax rise. Now, analysis released by Saffery Champness reveals that HM Revenue & Customs’ tax take increased by 9% in just two years since the threshold was frozen in 2009. (Data is not yet available for the 2011-12 tax year).
The number of estates on which this tax was paid has increased by almost 6%. HMRC received £2.585 billion from this tax for 2010-11.
With the freeze scheduled to continue until 2018, more families will be pulled into the inheritance tax net, and tax bills will rise.
Rising property prices and asset values will also impact on inheritance tax bills.
The £325,000 threshold is per individual. Any used portion can be carried forward and used by the second spouse/civil partner.
It is not all bad news. It is often possible to mitigate or avoid this tax with careful planning and professional advice.
As a British expatriate you may be able to change your domicile, which would mean you are only liable for inheritance tax on any assets located in the UK.
Changing your domicile is hard, but not impossible if you intend to live in Portugal permanently and cut ties with the UK. It is complex, and professional guidance is essential. You cannot ask HMRC for confirmation of your domicile as they would normally only review this when tax is due. They can deem you to be domiciled in the UK even if you consider that you are not – this would have huge, unexpected tax consequences for your heirs.
Even if you do change your domicile, you will still be deemed to be UK domiciled for the next three years.
Also, if you return to the UK in future you are likely to immediately regain your UK domicile status, plunging you right back into the inheritance tax net. Remember, even if you yourself do not return, your spouse may after your death – this is often the case with widows who want to be near their children. This would affect all assets passing to your children on the second death.
Changing your domicile is not the only way to escape UK inheritance tax. Many UK residents successfully protect their family from the tax. As a British expatriate, you should seek expert advice from a specialist who is au fait with the tax rules and domicile issues, so they can recommend the best solutions for your situation.
The 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 should take personalised advice.
Gavin Scott, Senior Partner of Blevins Franks. Gavin has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers.
Blevins Franks Financial Management Limited is authorised and regulated by the Financial Conduct Authority in the UK, reference number 179731. Where advice is provided overseas, via the Insurance Mediation Directive from Malta, the regulatory system differs in some respects from that of the UK. | www.blevinsfranks.com