PORTUGUESE tax residents must consider any Portuguese succession tax liability (officially a Gift Tax). It is only applied to assets located in Portugal – property, savings, bank accounts, etc –that pass to non-direct line ascendants or descendants. It is worth noting that there is no Double Tax Treaty that covers IHT, and so when making your financial plan, even if you intend to make a non-UK domicile claim, it is prudent to plan for the worst and keep detailed records.

What is UK IHT exempt?

Every individual has an exemption of £325,000 (nil-rate band), but this increases to £500,000 (inclusion of the residential nil-rate-band) where your main home is passed to your children or grandchildren, and your estate is below £2m. A couple can therefore have an exemption of up to £1,000,000.

In addition to this, savings in pension plans are exempt.

Options to reduce your UK IHT liability

Potentially exempt transfer (PET): A PET is exempt from IHT if the donor survives seven years. If death occurs before this, taper relief is given reducing the amount of IHT due on a sliding scale. Examples of PETs are outright gifts of cash or assets to another person and can be unlimited in value.

Chargeable lifetime transfer (CLT): Unlike a PET, a CLT is immediately assessed for IHT and potentially chargeable. If the gift value falls within your nil rate band there is no tax to pay, anything in excess will be taxed at 20%. CLTs are cumulative and there is a look back period of seven years, which can reduce the available nil rate band. An example of a CLT is a gift to a discretionary trust.

Care must be taken as it can get very complicated where several CLTs and PETs are made over a period, and the look back period can go as far back as 14 years, potentially bringing previously exempt gifts into the estate for taxation.

Charity: Any charitable donations left on death will not be included when calculating your taxable estate. Additionally, if you leave 10% or more to charity the rate of IHT is reduced to 36%, which can increase the amount your beneficiaries ultimately receive, even when taking into account the gift.

Annual exemption: Every person has an annual gift allowance of £3,000 and any unused allowance can be carried forward for 1 UK tax year.

Small Gifts Exemptions: You can give up to £250 p.a. to as many individuals as you like. The limit is per person,
and you cannot combine it with any other allowance used to the same person.

Non-standard pensions: QNUPS:  It is possible to establish Qualifying Non-UK Pension Schemes which can be IHT exempt. Whilst these are a type of pension, they are established with a capital sum and do not receive tax relief. One must be careful when setting these up if the intention is to mitigate UK IHT as they could be seen as tax avoidance if they are overfunded, illiquid or if there is no need for additional pension provision, eg if you have large pensions elsewhere. If they are set up for genuine pension provision purposes, eg with actuarial justification for income, they can be a good tool to employ.

Gift out of normal expenditure: This is the most generous of the exemptions as they are immediately outside of your estate for IHT (no need to wait seven years) and the amount is unlimited. However, you must be careful to meet the criteria:

• Gift needs to be made from income, not capital
• Gift must be regular, not a one-off
• Gift cannot affect/reduce your standard of living
• You must have mental capacity. Representatives cannot authorise such gifts.
• You cannot fund your lifestyle/care home costs from capital, and then gift income. The gift must sit on top of this.

The assessment as to whether the gift was successful will be on death so you must ensure that you keep accurate records as your executors will have to declare your income and expenditure for each year you intend to claim this relief. A claim will only be successful if there is excess income.

The Spectrum IFA Group Rua Sacadura Cabral, Lote 262, Loja C, 8135-144 Almancil
T: 289 355 316 / E: info@spectrum-ifa.com / W: spectrum-ifa.com