Estate planning always needs careful consideration but is even more important for expatriates, who face two key complications. First, there is the legal element – will your will work as it should in Portugal to ensure the right people receive your estate? Then there are cross-border tax issues – how much of your legacy will be lost to taxation?
As both Portuguese succession law and the inheritance tax regimes differ to the UK’s, doing nothing is unlikely to achieve the outcomes you want; you will need to take action to avoid some common pitfalls.
Mistake 1: Assuming your wishes will be fulfilled
The first big mistake many people make is assuming that once you have written a will, your intentions will be honoured in Portugal.
Unlike the UK, where you can leave your estate to whomever you choose, Portugal’s ‘forced heirship’ law prescribes that certain family members will automatically receive a portion of your estate. If you are Portuguese resident, this places your spouse and children in line to inherit at least half your worldwide estate (excluding non-Portuguese real estate), even if you nominate otherwise in your will.
You can override forced heirship by applying the EU Succession Regulation, ‘Brussels IV’. This enables you to elect for the succession law of your country of nationality to apply instead of that of your country of residence. You would need to state this in your will, otherwise Portuguese law will automatically apply (as has been the case since 2015).
Beware, however, that Brussels IV is relatively untested and may have unexpected consequences. For example, although it has no bearing on how your estate is taxed, applying Brussels IV can influence your domicile status and liability for UK inheritance tax. There may be more suitable ways to ensure your estate is distributed according to your wishes, so explore your options.
Mistake 2: Assuming your family will be recognised as such
Portugal’s version of inheritance tax – stamp duty – is relatively benign. At a fixed rate of 10%, it only affects Portuguese assets and does not apply to spouses and direct family members (ascendants and descendants). But what does the state define as ‘family’ for this purpose?
Portugal has a fairly traditional view of the family. While married/civil partners and biological children are recognised as direct family, unmarried couples and stepchildren may not be. This would apply not only for stamp duty, but also for succession law if forced heirship comes into play. For some, this can lead to an unnecessary tax bill and even the unintentional disinheritance of certain family members.
For instance, if you have children from a previous relationship and leave everything to your spouse, when your children come to inherit from them, they would be recognised as stepchildren (not direct family) and face 10% stamp duty on Portuguese assets.
There are steps you can take to make sure certain heirs are eligible for available exemptions. For example, after two years of living together, a couple can be treated as a married couple for tax purposes; no registration is required, but you would need to tell the tax office. The Portuguese authorities will also recognise legally adopted children as direct family for succession purposes.
Mistake 3: Assuming you won’t face UK inheritance tax
Liability for UK inheritance tax on your worldwide estate is based on domicile, not residence. While defining statutory residence is relatively straightforward – you will be deemed resident if you spend a certain number of days in that country or meet other conditions – there is no set formula for determining domicile. It is a notoriously complex area.
After years of living abroad, many British expatriates remain UK domiciled. Even those who have severed all ties with the UK to acquire a domicile of choice overseas can be caught out. Recent rule changes have also made it easier for non-UK domiciles to fall back into the net.
If you are deemed UK domiciled, 40% UK inheritance tax is chargeable on your worldwide estate (excluding some exemptions). However, wherever you are domiciled, all UK assets remain liable for UK inheritance tax.
So what about Portuguese assets that also attract Portuguese stamp duty? While parts of your estate could be liable in both countries, the UK-Portugal double tax treaty includes measures to prevent the same asset being taxed twice. In any case, careful tax planning can help ensure your chosen heirs do not face an unnecessary tax bill.
Ultimately, estate planning is a complex area, especially when you have to consider domicile law and the tax regimes of two countries. Take professional, personalised advice for peace of mind that the right money will go to the right hands in the most tax-efficient way possible.
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; individuals should seek personalised advice.
By Mark Quinn
Mark Quinn is a Partner of Blevins Franks in Portugal. He holds a Bachelor’s Degree in Finance, a level 4 Diploma in Financial Planning (DipFA) from the Chartered Insurance Institute (CII) and is a Chartered Financial Planner.