One of the tax attractions of living in Portugal is the local inheritance tax regime. With spouses and children exempt from this “stamp duty”, a relatively low rate of 10% and only assets located in Portugal being taxed, this is a much more benign system than in countries like the UK, Spain and France.
Unfortunately this does not mean that UK nationals living here escape death duties, because most remain liable to UK inheritance tax, with its 40% rate, wherever they live. Since inheritance tax is based on domicile, a much more permanent concept than residence, many expatriates are caught in the inheritance tax net even if they have lived outside the UK for many years.
It is important to pay attention to this tax, and understand the rules, changes and news, as your estate – and so your family and heirs – could be affected.
The latest data from HM Revenue & Customs (HMRC) shows that the amount it takes each year in inheritance tax receipts is rising. More families are falling into the inheritance tax net, and paying higher amounts of tax.
HMRC collected £3.4 billion over the 2013-14 tax year, 8.6% more than the previous year. The number of estates caught out reached 15,976, representing almost 3% of all deaths.
While asset values – property, personal savings and investments – have been rising, the inheritance tax threshold has been frozen at £325,000 since April 2009. It is scheduled to remain unchanged until 2018.
£3.4 billion is the third highest collection on record – the Treasury earned £3.55 billion in 2006-07 and £3.82 billion in 2007-08. Property prices then dropped and new rules from October 2007 enabled spouses to pass their allowance to their surviving partner on death, effectively doubling the threshold for many couples.
Inheritance tax revenues are rising at a faster rate than expected, with HMRC observing that the 8.6% increase was faster than the 7.9% increase seen the previous two years.
The Office for Budget Responsibility has already predicted that the number of estates paying inheritance tax will double by 2018-19, when almost 10% of estates would pay some tax. The Treasury is expecting to earn £5.8 billion by 2018-19.
As part of its last general election campaign, the Conservative Party had pledged to raise the threshold to £1 million if it came into power. This did not happen – blamed on the fact that their coalition partners, the Liberal Democrats, were against it.
As we start approaching the next election in May, David Cameron has already commented that he would like a higher threshold, saying that “inheritance tax should only really be paid by the rich, it shouldn’t be paid by those people who have worked hard and saved and bought a family house”.
But with inheritance tax being a nice little earner for the government, the Treasury would have to seriously consider the impact on state coffers and how it can make up the tax loss elsewhere.
There were news reports in the UK media recently that the HMRC had plans to accelerate the collection of inheritance tax by making some people pay the tax on their estate while they were still alive.
A spokesperson for HMRC denied this: “The government is not making any changes to the collection mechanism for inheritance tax, which is payable after death. In no circumstances is the government seeking payment of these charges during the taxpayer’s lifetime.”
They did go on to clarify that there are very specific circumstances where this can already happen, but this only affects a small minority of wealthy individuals who use aggressive tax avoidance schemes registered under HMRC’s Disclosure of Tax Avoidance Scheme.
Inheritance tax planning
Too many people do not pay enough attention to inheritance tax planning, either because they leave it too late or because they do not appreciate the impact and that they can do something about it. Expatriates may not realise they are still affected, or may mistakenly believe they are non-UK domiciled. This leaves their family and heirs to pay the – sometimes unexpected – price.
There are steps you can take to avoid or mitigate this tax, some fairly basic, others involving more planning. Expatriates may be able to adopt a domicile of choice here in Portugal, but this depends on your circumstances and future plans. Specialist advice is vital since this is a complex area and easy to get wrong.
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 Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, 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. | www.blevinsfranks.com