New UK Inheritance Tax Rules: What They Mean for British Retirees in Portugal

The recent overhaul of the UK’s inheritance tax (IHT) rules brings significant opportunities for British expatriates, especially retirees residing in Portugal. These changes could drastically reduce tax burdens on global assets for those living abroad long-term. Below is a detailed look at how these updates impact inheritance tax for British in Portugal.

Key Changes to UK Inheritance Tax (IHT) Rules

Previously, UK inheritance tax applied to all British nationals with a UK domicile, covering their global wealth, regardless of residence. The newly introduced system shifts from domicile-based taxation to a residency-based approach, which offers considerable relief for long-term expatriates.

1. Exemption for Long-Term Residents Abroad
• British nationals residing outside the UK for over 10 years will no longer pay IHT on their foreign assets. See recent article from Deloitte, scroll to Long Term Resident rule replaces domicile  paragraph 2.
• This rule applies even to individuals who have previously struggled to shed their UK domicile due to the rigid “domicile of origin” rules.
2. Streamlined Non-Dom Status
• Acquiring a “domicile of choice” in another country used to involve complicated procedures. The new rules simplify this by aligning taxation with physical residency.

 Inheritance Tax for British in Portugal:

Benefits

Portugal is a top destination for British retirees due to its favourable tax environment and high quality of life. With the updated UK rules:

• Foreign Assets are Exempt from UK IHT
  Retirees in Portugal with investments, properties, or savings outside the UK are free from UK IHT after residing abroad for 10 years.
• Simplified Estate Planning
  Retirees can now focus estate planning on Portuguese laws, which levy no inheritance tax for direct family members such as children and spouses. Instead, a Stamp Duty of 10% may apply to other heirs.
• Increased Financial Freedom
  The changes might encourage British retirees to diversify wealth internationally without worrying about UK tax implications on those assets after death.

Navigating Portuguese Taxation

While the UK tax changes are beneficial, it’s essential to understand Portuguese inheritance tax laws:

• No Traditional Inheritance Tax
  Portugal exempts direct descendants and spouses from inheritance taxation. Other heirs may face a Stamp Duty, but foreign assets are typically excluded.
• Residency and Wealth Tax Considerations
  Retirees should ensure they comply with Portuguese residency requirements to fully benefit from local tax laws.

Long-Term Implications

These reforms provide a clearer path for British retirees to secure their financial legacy. However, the 10-year residency requirement poses a key planning consideration. For those contemplating retirement in Portugal, the tax advantages can outweigh the commitment of a decade abroad.

Practical Steps for British Retirees

1. Establish Residency in Portugal
   Begin the residency process early to start the 10-year clock for foreign asset IHT exemptions.
2. Optimise Estate Structures
• Consolidate UK assets or consider transferring wealth away from the UK and optimise their future Portuguese liabilities.
• Draft a Portuguese will to align estate planning with local laws.
3. Seek Professional Advice
   Engage tax experts with experience in both UK and Portuguese systems to navigate complexities and ensure compliance.

Inheritance Tax for British in Portugal: Why These Changes Matter

These tax reforms have introduced a once-in-a-generation opportunity for British retirees to restructure their finances. With the favourable residency laws in Portugal and exemptions on foreign assets, retirees can now enjoy peace of mind about their inheritance tax liabilities.

Contact Ingenium Financial, fully qualified to provide pension advice for British expats in Portugal.

Managing your pension when retiring abroad involves navigating complex tax rules. For British retirees in Portugal, obtaining an NT (Nil Rate) Tax Code is essential for efficient UK pension tax management and avoiding double taxation This guide explains what the NT Tax Code is, its significance for UK pension income in Portugal, and how to apply for one.

What is an NT Tax Code?

An NT Tax Code for UK Pensions ensures that pension withdrawals are paid gross, without UK income tax deductions. For UK residents, pensions exceeding the tax-free allowance of £12,570 p.a. (2024/25) are taxed under PAYE. However, if you reside in a country like Portugal that has a Double Taxation Agreement (DTA) with the UK, the NT Tax Code prevents you from being taxed twice.

Important Note: Although UK taxes are avoided, pension income must still be declared and taxed in Portugal under local rules. Consult a tax expert to align with Portugal pension tax planning requirements.

Why Do British Retirees Need an NT Tax Code for UK Pension in Portugal?

Retiring in Portugal offers benefits like mild weather and a favourable cost of living, but tax compliance remains a critical consideration. Here’s why the NT Tax Code matters for retirees:

• Avoid Double Taxation: Without an NT code, UK pension providers deduct tax at source. This tax would need to be reclaimed while also paying Portuguese taxes.
• Simplify Finances: Receiving gross payments allows for better financial planning.
• Prevent Overpayment: The NT Tax Code avoids unnecessary deductions caused by emergency tax codes or PAYE rules.

How to Apply for an NT Tax Code

Step 1: Verify Your Tax Residency

Complete the appropriate Double Taxation Form to confirm you’re a tax resident in Portugal. Specific forms vary:

For Portugal and some other countries they are generic forms.

You’ll need details like your Pension Reference Number, which can be obtained from your pension provider.

Step 2: Submit Your Application to HMRC

See full guidance and access the latest forms at GOV.UK, click here.

If you’ve already left the UK, fill in form P85 online. If you haven’t already left the UK or don’t want to use the online system, download and fill in form P85.

The first step is now a series of questions which essentially take you through the UK Standard Residency Test, this is the UK a making sure that you are definitely no longer tax resident and therefore liable for UK taxes.

If you want to familiarise yourself with the SRT see the information on gov.uk, or click here.

Step 3: Processing Time

Expect a wait of 3–6 months for approval. Applying online minimises delays.

Step 4: Update Your Pension Provider

Once approved, the NT code appears in your Government Gateway account. Inform your pension provider to activate it.

Understanding UK Pension Tax in Portugal

Even after receiving your NT tax code, the initial pension withdrawal may still be taxed. This happens because the pension trustee must verify the NT code with HMRC before applying it. To avoid surprises, it’s recommended to test the system with a smaller withdrawal initially.

Each pension scheme requires its own NT tax code. If you hold multiple pensions, separate applications are necessary. However, consolidating these pensions into a single scheme may simplify tax management and administration.

It’s possible to withdraw up to £1,000 per month without an NT code and avoid UK taxation, provided no emergency tax code is active. However, such withdrawals do not exempt you from local tax obligations in Portugal, where your pension income must still be reported and taxed accordingly.

Eligible pensions for the NT tax code include UK Personal Pension Plans, Defined Contribution Schemes, and SIPPs (Self-Invested Personal Pensions), including International SIPPs. However, the NT code does not apply to QROPS (Qualifying Recognised Overseas Pension Schemes) as these should pay out on a gross basis.

By understanding these nuances, you can better manage your pension income, ensuring compliance with both UK and Portuguese tax regulations.

NT Tax Code: Essential step to avoid double taxation

Obtaining an NT Tax Code for UK Pensions is a vital step for British retirees in Portugal to avoid double taxation and simplify pension management. While the process requires patience, the long-term financial benefits make it worthwhile.

If you’re unsure about tax regulations, consult Ingenium Financial, experts in Portugal pension tax planning. We provide comprehensive, up-to-date and qualified guidance.  Ingenium Financial operate under a full EU licence (MiFID II), recognised by leading pension providers.