It is important for British expatriates to review their estate planning after a move to Portugal. Key factors to consider are wills, Portugal and UK succession laws, Brussels IV, domicile and inheritance taxes.
It is important for British expatriates to review their estate planning after a move to Portugal. Key factors to consider are wills, Portugal and UK succession laws, Brussels IV, domicile and inheritance taxes.
There are many advantages to living in Portugal, but it is not without some drawbacks, particularly unfamiliar local bureaucracy and a foreign tax system. Cross-border wealth management can get complicated too, particularly for succession planning.
It is important for British expatriates to review their estate planning after a move to Portugal, to take the local rules and their interaction with UK legislation into account.
Wills
A UK will is valid under Portuguese law, but it is more difficult, expensive and takes longer to prove than a Portuguese will. It is therefore advisable to have a Portuguese will to cover your Portuguese assets.
Make sure that your Portuguese will does not override or conflict with your UK will (if you have one). Your UK will should also acknowledge the existence of any overseas wills.
Note that you are best advised not to have a UK will if you are claiming to be non-UK domicile (see below) and have no UK assets.
Portuguese succession law
In the UK, a well drafted will allows you to leave your assets to the beneficiaries of your choice (within reason). England and Wales, Scotland, and Northern Ireland each have their own succession law.
Portuguese succession law, governed by its ‘Civil Code’ is very different. It imposes ‘forced heirship’ rules under which a specified minimum proportion of your assets must pass to specified heirs. Here are some examples.
If you do not have any descendants, 50% of your estate is reserved for your spouse. However if your parents are still alive it increases to 60%. If you have a spouse and descendants, the reserved portion is 60% of your estate, usually divided per capita, though if you have more than three descendants, one sixth goes to your spouse and 50% is distributed among descendants. If you only have descendants, the reserved portion is 50% if you have one child or 60% if you have more.
The reserved portion must be respected whenever possible, irrespective of the terms of a will or the intentions of the deceased.
Until last year, however, Portuguese succession law did not affect UK nationals living in Portugal because under its civil code, the general rule concerning succession was that the law of nationality of an individual applied. So Portuguese law automatically applied the UK succession law to the estate of a UK national, circumventing this forced heirship regime. This changed on 17th August 2015 when Brussels IV came into effect.
Brussels IV
Under the EU succession regulation known as ‘Brussels IV’, the default position is that the law of your country of habitual residence will apply to all of your assets. It is therefore possible that forced heirship rules could mean that your assets may not be inherited by the beneficiaries of your choice, unless you make specific planning arrangements to ensure that your wishes are fulfilled.
Under the Brussels IV regulation, you have the right to elect for the succession law of your country of nationality to apply to your estate on death. You can then therefore opt for UK law to govern how you share your assets among your chosen heirs. You must make this election in your will or similar legal document, or Portuguese law will apply.
Although this is an EU law, it applies to third party nationals as well, so the Brussels IV will continue to apply to British expatriates after Brexit.
Residence and domicile
In most countries ‘residence’ and ‘domicile’ have the same meaning. However, UK tax law makes a clear distinction. In broad terms:
- ‘Residence’ defines the country in which you are liable to tax on income and gains
- ‘Domicile’ (or ‘deemed domicile’) defines whether your estate will be liable to UK inheritance tax.
‘Domicile’ has a specific legal meaning in UK law; if you start life with a UK domicile (domicile of origin) you are liable to retain your UK domicile status even if you move abroad, particularly if you maintain ties to the UK, such as a house. While it is notoriously difficult to shed UK domicile, it is not impossible if you leave permanently and cut as many ties as possible.
So you can be resident in Portugal for many years yet remain a UK domicile. Your country of domicile will have a profound effect on your succession planning, so your first step should be to establish whether you are UK or Portuguese domiciled (although bear in mind it may change in future, for example if you or your widow/er returns to the UK).
Inheritance taxes
If you are a UK domicile, your worldwide estate is liable to UK inheritance tax. Assets in the UK are always liable, regardless of domicile.
The tax is paid by the estate, at a rate of 40% over a threshold (‘nil rate band’) of £325,000 (potentially up to £650,000 for a couple, depending on how much is used on the death of the first spouse). Spouses and civil partners are generally exempt. This is a brief summary of detailed and complex legislation, so take specialist advice.
In Portugal inheritance and gifts tax was abolished in 2004 and replaced with stamp duty. This tax only applies to assets located in Portugal, and spouses and direct line descendants and ascendants are exempt. The standard rate of stamp duty is 10%, and it is paid by the recipient. It applies even if the recipient does not live in Portugal.
Portugal’s benign inheritance tax regime is one of the attractions of living here, though there is no guarantee it will stay like this forever.
Estate planning
Inheritance tax is sometimes referred to as a ‘voluntary tax’ as there are a number of steps you can often take to reduce this liability for your heirs, sometimes significantly. Some are fairly basic, others involve more planning and need a good understanding of the legislation. The solution you use should be designed around your family’s situation and your objectives.
Besides the tax and law issues explored here, the first step of your estate planning should be to establish who you want to inherit your assets, and when. You may, for example, want to delay someone’s inheritance or stipulate what it is to be used for.
Importantly, you need to take both Portuguese and UK rules into account, to establish the most effective and appropriate estate plan for your family. Specialist advice is vital since this is a complex area.
Any questions? Ask our financial advisers for help.
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.
