Unlike many other UK taxes, UK inheritance tax (IHT) will follow you around the world. You cannot leave it behind as easily as the British weather or even most other UK taxes. As a British expat
Unlike many other UK taxes, UK inheritance tax (IHT) will follow you around the world. You cannot leave it behind as easily as the British weather or even most other UK taxes. As a British expatriate living here in Portugal, depending on the value of your estate it could easily still fall into the IHT net, leaving less of an inheritance for your children than you may expect.
The issue with IHT is domicile, which is a concept of UK common law. It is domicile, rather than residence, which determines your liability to IHT. Your place of domicile does not have to be the country where you have your closest personal association – you can live in Portugal for many years and still remain domiciled in the UK. The basic rule is that a person is domiciled in the country in which he has his home permanently or indefinitely. This is often described as the country which you regard as your “homeland” or the place where you intend to die and be buried.
If you are British then the chances are that your ?domicile of origin? is the UK. You will therefore be a UK domicile for the rest of your life unless you move overseas indefinitely and take steps to adopt a ?domicile of choice? in your new country, in this case Portugal.
Inheritance tax is charged on your worldwide estate, including property, investments, bank deposits, cars etc, so it includes everything that you have in Portugal or offshore. There is no IHT on assets passing between spouses or civil partners.
The current threshold is ?325,000 for individuals and ?650,000 for married couples or civil partners. It used to increase each year but is frozen at this level until at least April 2015. Many more estates will fall into the IHT net as a result.
IHT is often described as a ?voluntary tax? due to the number of tax avoidance measures which may be employed to mitigate or avoid this potentially onerous tax.
If you really have made a permanent move to Portugal, and intend to stay here for the foreseeable future without ever intending to return to the UK, then you can take the necessary steps to establish a domicile of choice in Portugal. While it can be difficult to change your domicile it is not impossible.
You would need to be resident and paying tax here in Portugal. You must establish a permanent home here and cut as many ties with the UK as possible, such as selling UK property, scaling down UK bank accounts, resigning memberships etc. You should make a Will here in Portugal, obtain a Portuguese driving license and possibly even buy a burial plot here.
Even then it takes at least three years to shed UK domicile for IHT purposes, i.e. you will be treated as deemed domicile in the UK for IHT if you were UK domiciled at any time within the previous three calendar years (36 months); or were resident in the UK for any part of at least 17 of the last 20 tax years (the current year being the 20th).
Domicile can be complex and difficult to prove and HM Revenue & Customs (HMRC) will not make a decision on your status until there is a tax issue at stake and even then the onus is on you (or your family on inheriting your assets) to prove that you are non-domiciled. You need to be able to leave your heirs proof that they can use with HMRC if necessary to show you were non domiciled. It is therefore important that you take professional advice, to give you reassurance that your heirs will not be landed with an unexpected tax bill.
Even if you have lost your UK domicile after living here for a number of years, if you or your spouse return to live in the UK you will immediately become UK domiciled again. Since many widows do return after their husband dies to be close to their children and grandchildren, this is a serious possibility to consider. Relying on changing your domicile alone can therefore be quite risky as it may change back again, even if you do not expect this now.
If you give or leave Portuguese assets to anyone other than your spouse or children the assets will also be subject to Stamp duty.
Stamp duty in Portugal is a tax on both lifetime gifts and assets passing on death, and applies only to Portuguese situated assets. This tax therefore always applies to any Portuguese real estate you own, regardless of where you are resident. However, the good news is that spouses and children are exempt, and the rate for anyone else is just 10% – much lower than in the UK.
For UK/Portuguese double taxation, although there is no specific double tax treaty applicable to taxes on gifts or death, the UK will give unilateral relief so that there is no double taxation.
Inheritance taxes can often be mitigated or avoided with professional guidance and advance planning, so if you want to be confident that all your estate will go to your heirs rather than the taxman you should seek advice from Blevins Franks which has had decades of experience in this area.
By Bill Blevins, Managaing Director, Blevins Franks
3rd March 2011
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 must take personalised advice.