Upcoming changes to inheritance tax could deliver significant savings to British expats living in Portugal if they have been living outside the UK for a sizeable period

Experts say the government’s introduction of a residence-based taxation system could see long-term expats escape being hit by 40% inheritance tax (IHT).

 

Under the new system, effective from 6 April 2025, IHT will apply to worldwide assets for individuals who have been UK tax residents for at least 10 out of the last 20 tax years.

 

However, British expats who fall outside this threshold will generally escape IHT on non-UK assets, provided they meet certain conditions.

 

This means as long as they have been non-resident for at least 10 out of the past 20 tax years, their non-UK assets, such as property, savings, and investments, will no longer be subject to 40% IHT.

 

‘This is a significant relief for expats who plan their financial and property portfolios wisely.

 

‘By keeping your assets outside the UK, you can ensure they remain free from the heavy burden of UK IHT. When combined with the benefits of NHR in Portugal this offers significant planning opportunities.’

NHR is Portugal’s non-habitual residency tax regime – which is set to close in its current form in 2025. It offers 10 years of more preferable tax rates for those moving to Portugal and those already on the scheme can continue to enjoy the benefits.

 

However, it is important to note that NHR is time limited so once the NHR period expires, these individuals become subject to Portugal’s progressive tax system, with rates as high as 48%. This means that tax planning is critical.

 

From 2025, the NHR is being replaced by the Incentive for Scientific Research and Innovation, which is less attractive to high net worth individuals (HNWIs).

 

‘Portugal has long been hugely attractive to HNWIs looking to trade up the economic, political and climate gloom in the UK for the 300 days of sunshine Portugal offers,’ Stannard said.

 

‘As a safe and stable country with a lower cost of living to the UK, we’ve seen ever increasing demand from those wanting to make the move.

 

‘The IHT development is good news for many British expats – but it does mean they need to seek professional advice on how to ensure they make the most of the opportunities.’

 

However, expats need to also be alert to the proposed inclusion of pensions in the scope of UK IHT.

 

This means any remaining pension fund will be subject to tax at 40% on death.

 

The change, due to be introduced in April 2027, makes it even more critical for UK ex-pats to take proactive steps with their pension funds, especially during their NHR period when they can access them at much-reduced income tax rates.

 

Making pension pots subject to IHT means everyone should review how they are currently using their pension.

‘NHR allows you to plan your future and optimise tax efficiency while safeguarding your wealth. This strategy ensures expats can fully capitalise on the latest tax rules while avoiding unnecessary liabilities.’

Source Accountancy Daily

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