Chances are, you’ve thought about your financial planning to prepare for the life you want. Have you made financial arrangements for your future heirs with careful estate planning? A good start is to ask a few key questions.
Who will receive your inheritance?
Unlike the UK, where you are free to leave your estate to whoever you want, Portuguese “forced inheritance” law dictates how assets are passed on. For Portuguese residents, this means that your spouse and direct family could automatically inherit at least half of your World Heritage, regardless of your intentions.
This is a relatively new concern – prior to August 2015, the default position was that the law of your home country applied to your estate. Now, under the EU ‘Brussels IV’ regulation, Portuguese forced inheritance applies automatically, unless you specifically name the relevant UK law in your will.
While your ability to override forced inheritance in this way will not change after Brexit, it could lead to unwanted tax implications, so be sure to explore your options.
What will your inheritance be spent on and when?
You may want to establish some control over when your heirs receive your inheritance and how they can use it, without incurring a costly and lengthy probate process.
It is possible to structure your capital in such a way as to offer you favorable tax advantages throughout your life while being in control and certainty after your departure. This could allow you, for example, to delay the timing of an inheritance until your heirs reach an age where they are likely to be financially mature. Ask your advisor about solutions tailored to your specific goals and your family situation.
Who will pay the tax on your estate?
Unlike the UK, where inheritance tax is usually paid by the estate before changing hands, in Portugal each beneficiary pays.
The Portuguese equivalent of the inheritance tax – the stamp duty – is relatively minimal in terms of scope and cost. It only applies to assets such as real estate, vehicles and stocks located in Portugal and passed on as an inheritance or as a lifetime gift. Spouses and direct ascendants / descendants are not responsible, but gifts to any other person have a fixed rate of 10%, regardless of their place of residence.
Those who have remarried or have more complex families should note that Portugal’s fairly traditional view of the family means that unmarried partners, step-parents and step-children might have to pay stamp duty on Portuguese property. inherited / given between them. However, exemptions are available through measures such as adoption and proof of cohabitation.
As in Britain, inherited property cannot change hands until tax is paid, so some heirs may have difficulty paying within the six-month deadline for higher-value inheritances. .
Are you going to attract inheritance tax in the UK?
Since UK inheritance tax liability is determined by domicile rather than residence – and domicile is an incredibly ‘sticky’ concept – it continues to affect many Brits living here. Those captured are subject to UK inheritance tax of 40% on their World Heritage, as well as Portuguese stamp duty on assets located here (although measures are available to avoid double taxation on the same asset) .
Domicile law is very complex, so take advice from a specialist to establish your position and plan accordingly.
What about your own needs?
While you want the best for your heirs, make sure you can enjoy your wealth in the meantime. The trick is to make sure the right money goes into the right hands at the right time while still hitting your retirement goals. Look for Portuguese-compliant opportunities that allow you to make the most of what you have, providing tax benefits 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. Benefit from specialized and personalized advice to ensure you have the most suitable and tax-efficient approach for you and your chosen heirs for the years to come.
By Adrian Crochet
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Adrian Hook is a partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to British nationals in the Algarve since 2008. He holds the Diploma of Financial Advisor (DipFA) and is a member of the London Institute of Banking and Finance (LIBF) .