No UK Inheritance Tax if you live in Portugal?! (2024)

New rules mark a major shift, particularly impacting British expatriates who have been living overseas for extended periods, replacing the concept of domicile with new long-term residence (LTR) rules. Under these new rules, the test for liability to UK IHT will be based on residency.

Those who have lived outside of the UK for at least 10 of the last 20 years will now be classified as non-UK long-term residents. This change means their global assets (except UK based holdings such as pensions, property, investments) will be exempt from UK IHT.

If an individual does not meet the non-residency criteria at death, their entire estate remains subject to UK IHT and the usual rules, exemptions, and tax rates apply.

New incentives: tax breaks on return to the UK

The budget introduced two noteworthy provisions for British expats considering a return to the UK:

1. Four Years of Tax-Free Foreign Income and Gains: The Foreign Income & Gains (FIG) rules allow non-UK LTRs returning to the UK to enjoy tax-free treatment on income and gains from overseas assets for up to four years.

2. 10-Year IHT Exemption: Returning expats can benefit from a 10-year IHT exemption on non-UK assets, provided they are are still classified as non-UK LTRs at the date of death. After this 10 year period, full UK LTR status applies, reinstating IHT liability on worldwide estates.

Pensions, QROPS & QNUPS – what has changed?

Under the revised rules, expats who have previously relied on UK pensions and offshore pension schemes such as Qualifying Recognized Overseas Pension Schemes (QROPS) and Qualifying Non-UK Pension Schemes (QNUPS) to protect their wealth will no longer be sheltered from UK IHT if deemed UK LTR at death.

Moreover, those who are non-UK LTR at death, but still hold UK based pensions will still suffer UK IHT on the pension as it is a UK situ asset.

An added element is how pensions interact with the Portuguese Non-Habitual Residence (NHR) regime and how, once the scheme ends, pension are generally taxed at scale rate of income tax (up to 53% with solidarity taxes).

Therefore, Portuguese residents with or without NHR who are holding UK, QROPS and QNUPS pension holders should revisit their pension planning.

Where death of the pensioner occurs before age 75, beneficiaries receive UK and overseas pension income tax free and post age 75, the beneficiary is taxed at their marginal rates of income tax. There have been no changes to these rules.

However, with the introduction of IHT to pensions, where death occurs after age 75, beneficiaries could be hit with a “double whammy” of 40% IHT and then income tax up to 45% on any drawdown.

Expats holding pensions should therefore be aware of this potential for double taxation and consider restructuring options for their intended beneficiaries.

Other benefits for expats

Most Brits will be aware of the “7 year rule” when making gifts during their lifetime, whereby there is the potential for the gift to be brought back into the UK IHT net if death occurs within 7 years.

An interesting outcome of the budget is, where a non-UK LTR gifts a non-UK asset, the gift is immediately exempt from UK IHT. There is no 7 year waiting period. Moreover, if the donor subsequently returns to the UK this gift will remain outside of the scope of UK IHT, even if death then occurs within the 7 years or the donor becomes a UK LTR again.

00:30 Basis for assessing UK Inheritance Tax – domicile and residence based tests
03:53 Long term and non long term residence
04:47 Planning opportunities when returning to the UK
05:44 Potential Exempt Transfers
07:05 Affect UK budget changes on pensions

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