Estate planning always needs careful consideration but is even more important for international residents that have made Portugal their home – there are two main areas. Firstly, there is the legal element – will your will work in the way you intended in Portugal? The second is cross-border tax issues – how much of your legacy will be lost to taxation, either in Portugal, or your country of origin?

As both Portuguese succession laws differ from the UK’s inheritance tax regime, doing nothing is unlikely to achieve the outcome you intend. You will need to take action to avoid some common pitfalls.

Mistake 1: Assuming your Wishes will be Fulfilled

A big mistake many people make is to assume that an existing will can be suitable for Portugal.

Unlike the UK, where you can leave your estate to whomever you choose, it's not the same in Portugal. Portugal’s ‘forced heirship’ law prescribes that certain family members will automatically receive a portion of your estate.

If you are a Portuguese resident, this places your spouse and children in line to inherit at least half your worldwide estate.

You can override forced heirship by applying the EU Succession Law, ‘Brussels IV’. This enables you to choose 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).

Mistake 2: Misunderstanding how Portugal defines “family”.

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 recognized as direct families, 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 it becomes a different case. When your children come to inherit from them, they would be recognized 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 the available exemptions.

For example, after a couple lives together for two years, they can be treated as a married couple for tax purposes. No registration will be required, but you would need to tell the tax office. The Portuguese authorities will also recognize legally adopted children as direct families for succession purposes.

Mistake 3: Assuming you Will Not 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. However, there is no set formula for determining domicile.

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.

As demonstrated by many legal cases, it is much harder to prove the loss of a domicile of origin than confirm a domicile of choice. Recent rule changes have also made it easier for non-UK domiciled individuals to fall back into the net.

If you are deemed UK domiciled, 40% UK inheritance tax is chargeable on your worldwide estate (after applicable allowances) Even if you acquire a new domicile other than the UK (a domicile of choice) UK assets remain liable for UK inheritance tax.

So what about Portuguese assets?

While parts of your estate could be liable to tax in both countries, the UK-Portugal double tax treaty includes measures to prevent the same asset from being taxed twice. Careful tax planning can ensure your chosen beneficiaries do not face an unnecessary tax bill.

Conclusion

Ultimately, estate planning is a complex area, especially when considering domicile law and the tax regimes of two or more countries. Take professional tax, legal and financial 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 summarized; individuals should seek personalized advice.


The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this report constitutes a solicitation, recommendation, endorsement, or offer by HOLBORN or any third-party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction.

Holborn Insurance Agents, Sub-Agents & Consultants (Cyprus) Ltd authorised by the Cyprus Insurance Companies Control Services (ICCS) License number 5228. Passported to distribute Insurance activities and services in Cyprus, Spain, France, Malta, Belgium, Luxembourg, Sweden and Portugal.

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