Avoid These 3 Common Mistakes

Aug 1, 2022 | Europe, Investments, Tax, UK

If you are an expat living in Portugal, it’s important to take the time to properly plan. We all know that taxes can be tricky, especially when it comes to passing on your assets. Unfortunately, many make common mistakes that can cost them dearly down the road.

In this post, we’ll discuss three of the most common mistakes and how best to protect yourself from unnecessary tax bills. Read on to learn more!

When you think about estate planning, the first thing that comes to mind is probably making a Will. But if you are an international resident that has made Portugal your home – there are some important considerations which need to be carefully thought out before going through with any proceedings.

The two main areas include:

  • The legal element – will your Will work in the way you intended in Portugal?
  • Cross-border tax issues – how much of your legacy will be lost to taxation, either in Portugal, or your country of origin?

Portuguese succession laws are different to the UK’s inheritance tax regime, so doing nothing may not achieve your desired outcome. You will need to act in order to avoid some common pitfalls.

1: Don’t assume your wishes will be fulfilled

It is important to check the suitability of an existing Will for Portugal.

A portion of your estate is automatically distributed to certain family members under Portugal’s ‘forced heirship’ law. This is different to the UK, where ones can leave their estate to whomever one chooses. Consequently, this places your spouse and children in line to inherit at least half of your worldwide estate if you are a Portuguese resident.

As of 2015, Portuguese law will automatically apply unless you specifically state this in your Will. By applying the EU Succession Law, ‘Brussels IV’, you can override forced heirship. Rather than applying the country’s succession laws, you can choose the laws of your nationality.

2: Defining “family”.

Stamp duty, Portugal’s version of inheritance tax, is relatively favourable. Only Portuguese assets are affected at a fixed rate of 10%. The tax does not apply to spouses or immediate family members (ascendants or descendants).

But how does Portugal define “family”? 

The Portuguese approach to family is fairly traditional. Marital/civil partners and biological children are recognized as direct families, but an unwed couple or stepchild may not be considered so.

If forced heirship is involved, this would apply not only to stamp duty but also to succession law. The result can be an unnecessary tax bill for some and even disinheritance for others.

If you have children from a previous relationship and leave everything to your spouse, then it becomes an entirely different case. Upon inheriting from them, your children would be treated as stepchildren (not direct relatives) and would face a 10% stamp duty

So, what steps can you take to ensure certain heirs are eligible for exemptions?

When a couple lives together for two years, they can be treated as married for tax purposes. Registration is not required, but the tax office will need to know. Legally adopted children will also be recognized as direct families by the authorities for purposes of succession.

3: Ignoring UK Inheritance Tax

The UK inheritance tax system is based on where you’re domiciled, not your residence.

In general, the statutory residence is defined as spending a certain number of days in that country. Domicile, however, cannot be determined by a set formula.

After years of living abroad, many British expats remain UK domiciled. Even those who have severed all ties with the UK to acquire a new home base can find themselves being caught out. Several legal cases have demonstrated that losing a domicile of origin is much more difficult than confirming a domicile of choice. It has also become easier for non-UK domiciled individuals to fall back into the system due to recent rule changes.

The inheritance tax liability of a UK domicile remains even after you move elsewhere in Europe or overseas. If you are deemed a UK resident, 40% UK inheritance tax is chargeable on your worldwide estate (after applicable allowances). You may have a new domicile, but UK assets will be liable for inheritance tax in your country of residence.

What about my Portuguese assets?

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

If you are an expat living in Portugal, it is important to take the time to properly plan. You want to make sure that you pass on your assets in a way that benefits not only yourself but also your loved ones. Unfortunately, many people make common mistakes that can cost them dearly down the road. That’s where our team of experts at SJB comes in. We can help you navigate these tricky waters and ensure that everything goes according to plan. Contact us today for more information on how we can help you achieve your goals.

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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By scheduling an appointment with an adviser they will reach out to you at your requested time. 
Personal advice, whenever it suits you.

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