Many readers are enjoying their retirement years here in Portugal; taking advantage of all the benefits living in the Algarve has to offer. You are reaping the rewards of all your hard work advancing your career, perhaps building up and selling a business, and the effort you put into accumulating your savings, investments and pension funds. Some readers may have inherited capital which helped them achieve the dream of moving here.
You may have put a lot of thought into your wealth management in the past, to ensure it will provide you with the retirement lifestyle you were aiming for. There comes a time, though, when we need to re-look at our financial planning to shift the focus to multi-generational wealth management.
How will your wealth be passed down to your children, grandchildren and any other chosen heirs? How will they handle your legacy? Will it help give them long-term financial security? Or will they maybe spend it hastily and make decisions they will regret in the future? How much will they actually receive, and how much will go to the taxman?
You may have concerns about them spending their inheritance unwisely. You may be unsure about their partners. You may wish to delay their inheritance until an age when they should be financially mature. You may want your grandchildren to have the money to benefit from a good education.
Complex family situations need particular consideration; for example, if you remarried and have children from both marriages, or need to consider step-children.
So you may wish to establish a way to gift with certainty, where you still have some control over when your heirs receive their funds and how they use it.
Taxation is another essential component of estate planning.
The Portuguese equivalent of inheritance tax is stamp duty. It only applies to assets located in the country, and inheritances and gifts received by spouses and direct line ascendants and descendants are exempt. For everyone else the rate is 10%.
This is one of the tax advantages of living in Portugal. However, there is no guarantee that it will stay this way. The political left has been known to favour introducing an inheritance tax on worldwide estates in excess of €1 million. This was not included in the new Socialist government’s 2016 budget, but it may be something it considers in the future, especially if it has to find ways to increase tax revenue.
In any case, UK nationals are also faced with the more penal UK inheritance tax. Determined by domicile rather than residence, it continues to affect many British expatriates living here. For wealthier families the tax bills can be considerable.
If your estate falls in the inheritance tax net you need to establish how best to legitimately protect your family from paying too much tax.
It is not just inheritance tax you need to think about. If you are leaving your heirs savings and investments, once they receive the funds they will start to pay tax on the income and gains. So you should think about which arrangements to use to hold your investment capital, so that it is tax efficient for them. Also consider how these investments will pass on to chosen heirs – will it be a drawn out and costly process, or can ownership easily change hands?
Writing your ‘last will and testament’ is one key step in estate planning. In fact, you may need one covering your Portugal assets and one covering UK assets. But a will can only go so far. If you are looking to gift with control, and reduce taxation, you need to employ other arrangements as well. Cross-border estate planning is complex, and needs to take multi-jurisdictional succession law, inheritance taxes and probate into account. Specialist advice is essential.
Finally, do not forget your own needs. You may want the best for your heirs, but you also have to ensure you and your spouse continue to benefit from your wealth in the meantime. You need arrangements where you retain control over at least some of the funds and which provide tax benefits for you today as well as for your heirs in the future.
In summary, ensure the right money passes to the right hands at the right time, while still meeting your retirement objectives. There are compliant opportunities available in Portugal that can allow you to do all this, and which provide significant tax advantages. This is a specialist area, take professional and personalised advice to have peace of mind that you have got it right.
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