Take steps to future-proof your legacy

You may have put a lot of thought into your financial planning to make sure you have enough for the retirement you want in the Algarve. Have you given the same attention to your estate planning? If so, is it up to date?

Writing a will is by no means the only step. Cross-border estate planning is complex and there are various things expatriates in Portugal should consider, such as local succession law, taxation and wealth management across generations. A good start is asking yourself 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, it means that your spouse and direct family could automatically inherit at least half of your worldwide estate.

This is a recent development. Before August 2015, UK law automatically applied to estates of British nationals. However, since implementing the new ‘Brussels IV’ EU regulation, Portugal’s succession law is the default regime for all residents – and this will not change post-Brexit.

You can override this position by nominating UK law in your will, but take care. While Brussels IV does not determine how you are taxed, it is a new and complex regulation that could invite unexpected tax implications. Make sure you explore all the available options to achieve your aims in the most suitable way.

What will your legacy be spent on and when?

It is possible to establish some control over when your heirs receive your legacy and how they can use it, without an expensive and lengthy probate process. This could be important if you worry that your heirs might spend their inheritance unwisely and make decisions they will regret. Or you may have reservations about their marital stability and who might end up getting your legacy.

You could address these concerns by using a trust structure, for example, to delay the timing of an inheritance until your heirs reach an age where they are likely to be financially mature. You could also potentially ring-fence what you leave, so it can be used for something specific, such as your grandchildren’s education or buying their first property.

Who will pay tax on your legacy?

Unlike the UK, where inheritance tax is usually paid by the estate of the deceased, in Portugal it is paid by the person on the receiving end.

The Portuguese equivalent of inheritance tax – stamp duty – is relatively minimal in terms of both scope and cost. It only applies to assets like real estate, vehicles and shares that are located in Portugal and passed on as an inheritance or a lifetime gift. Spouses, direct line ascendants and descendants are not liable, but gifts to anyone else – regardless of their residency – attract a fixed rate of 10%.

Those who have remarried or have more complex families should note that Portugal takes a very traditional view of the family. The 10% stamp duty will apply to step-children and unmarried partners, although exemptions can be secured through adoption and proof of at least two years’ cohabitation respectively.

As in Britain, inherited assets cannot change hands until the tax is paid. As a result, some heirs may find it difficult to pay within the six-month deadline, particularly on higher-value inheritances.

Will you attract UK inheritance tax?

British nationals could 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).

As UK inheritance tax liability is determined by domicile rather than residence – and domicile is an incredibly ‘sticky’ concept – it continues to affect many British expatriates living here. 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. Every family is different, so your approach should be tailored to meet your personal objectives and unique situation. With careful planning, you can have peace of mind that your legacy will be distributed as you wish without leaving your heirs an unnecessarily high tax bill.

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
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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.