By: John Glover (MBA) 

The Portuguese tax system does not levy an inheritance tax, which at first glance may seem advantageous to overseas expats considering relocating to this beautiful part of the Mediterranean. However, an often-overlooked factor is that the inheritance process largely depends on the rules in the country where you are a domicile.

British citizens normally remain UK domiciles, regardless of how long they live overseas and whether they have become tax residents, permanent residents or even dual citizens in a new location. 

Chase Buchanan’s team in Portugal clarifies how inheritance tax works, how forced heirship rules may apply to your estate, and what you can do to ensure your assets and wealth are distributed according to your wishes.

Domiciliary vs Residency Status – And Why It Matters

Domiciliary status is less widely known than other aspects of relocating overseas. In brief, you are assigned a place of domicile when you are born, which is normally your country of birth, but can differ if you were assigned a domicile of dependence or choice. 

Your domiciliary position is not necessarily the same as your nationality, nor is it always linked to your place of residence. Instead, domicile is best explained as a political or emotional concept. Although the vast majority of people have the same country of domicile as their nationality, it isn’t always this straightforward.

This all matters because if you were born and have always lived in the UK, it is most likely that you will also be a British domicile. Relocating, gaining dual citizenship or registering as a tax resident will not influence your domiciliary position.

HMRC will often categorize British nationals living overseas as UK domiciles, which means your estate might be exposed to UK inheritance tax rates, which can be as high as 40% against your worldwide assets after exemption thresholds.

 For Portuguese tax residents, that could mean your beneficiaries are liable to pay both UK inheritance taxes and Portuguese stamp duty, but applying the correct double taxation treaties should avoid this excessive tax exposure.

Changing your country of domicile is possible but equally complex. Domicile law requires specialist legal guidance, and you can have more than one nationality or citizenship but only one domicile. It is essential that you proceed with caution before making any decisions.

Understanding Inheritance Taxes in Portugal

The Portuguese tax system works differently, and if you do not have a valid, up-to-date Will, the Portuguese tax authorities may decide that your estate will be taxed according to the rules in your home country. Residents may also find that the provisions made in their Will are considered invalid since there are rules about how assets within your estate can be distributed.

Succession laws dictate how estates are shared between direct family members and may apply to your worldwide assets, excluding only real estate held outside of Portugal. 

Those succession rules, also called the forced heirship system, entitle a spouse and children to claim minimum and specific proportions of your estate, normally with 50% ring fenced and only able to be passed to a spouse and your descendants. 

To add to the complexity, the exact proportion of your estate that is subject to forced heirship regulations will also depend on whether you have a surviving spouse and how many children or grandchildren you have.

Note that if you are a non-UK domicile and live as an expat in Portugal, any British property assets will remain exposed to UK inheritance tax – these rates apply to all assets within the UK, irrespective of your country of residence, domicile or citizenship.

The Importance of Creating a Will as an Expat Living in Portugal

Although forced heirship can mean that a percentage of your estate is automatically directed to your immediate relatives, you do have autonomy over how the remainder of your assets are managed. 

You can also take steps to prevent your estate being distributed against your wishes by gifting assets to any recipient of your choosing – whether a relative, a family member who would not be treated as a direct heir, a friend or a charity or institution you wish to support.

In addition to gifting, you should ensure you have a legally valid Will, which is recognised within Portugal. This documentation can include clauses to protect the rights or exclude beneficiaries who would otherwise be included within forced heirship distributions – such as an estranged child or spouse.

Your Will can also include provisions that state your preferences for the succession laws applied to your estate, where you may be able to opt for British inheritance regulations to apply, in preference to Portuguese forced heirship rules.

Portuguese Stamp Duty vs UK Inheritance Tax

As we’ve mentioned, there isn’t an inheritance tax in Portugal per se, but there is a stamp duty, called the Imposto do Selo, charged at a flat 10% rate. This tax applies to assets held within Portugal and is not applied to any assets held in other countries. 

The Portuguese tax system will not issue a stamp duty charge against verified direct beneficiaries, including parents, children, grandparents and grandchildren who inherit assets held within Portugal.

The exception applies to non-Portuguese residents, who may incur administration fees to cover the cost of managing the transfer of assets and translating official documentation. Tax exemptions may also apply to heirs who receive an inheritance from Portugal, including dividends, life insurance credits, personal possessions and social security allowances, all of which are normally tax-exempt.

Managing Your Inheritance Tax Exposure and Estate as a Portuguese Expat

The information covered in this article illustrates why estate planning and inheritance are far from straightforward. Much will depend on your specific circumstances, such as:

• The type, value and location of your assets.
• Whether you own property and in which country.
• The status and legality of your Will.
• Exposure to forced heirship regulations.
• Your domiciliary and tax residency status.

Our advice, as always, is to speak with an experienced wealth management consultant or financial adviser who can assess your current estate value, advise on tax treatments and exposure, and provide insights into potential ways to safeguard your estate for your loved ones.

Published by: Nelly Chavez