Portugal-based UK expats miss vital tax change

Many UK expats based in Portugal have retained their trusts, even though the Government introduced a tax of 28% on trust distributions from 1 January 2015.

Despite the existence of several planning options, including an offshore bond, Jason Porter, director at advisory firm Blevins Franks, said many clients remained unaware of the introduction of the first ever trust law last December.

The rules resulted in any distribution made from a trust to a Portuguese resident recipient becoming taxable at 28%, with no deduction for initial cost or capital invested.

Porter said only when a trust was entirely wound up, and the assets distributed to the settlor, would the distribution be taxed to the extent of the actual gain – the difference between the value of the assets distributed or the funds received after the winding-up – and the capital would then be gifted into the trust.

“While each case is different, a Portuguese-resident UK expatriate with assets trapped in a trust should not bury their head in the sand. There remain many planning opportunities,” said Porter.

One option he suggested was the payment of distributions on the winding-up of a trust to someone other than the settlor.

The payment could then be subject to 10% inheritance tax, known as ‘stamp duty’ in Portugal, rather than the 28% tax, but as the payment is of foreign property to a resident of Portugal, stamp duty is not payable.

“In addition, the new law only applies to payments made to residents of Portugal. Any payments to non-residents should not be affected.”

He added it was important for clients to look at the current valuation of the trust compared with the capital initially invested, as there may be no gain attributable, meaning the holder would not be subject to the new tax.

This could particularly be the case if Portuguese real estate was present.

Though these changes mean trusts are unlikely to be a viable option for any new UK expatriate arrivals in Portugal, a potential route to similar tax benefits Porter suggested for UK expatriates was an offshore bond.

Much like in the UK, these offer tax-free roll-up of income and gains, with capital redeemed free of tax.

Only the growth element of any distribution is subject to taxation.

Even then, additional benefits in Portugal include only 80% of the growth being taxable after five years, and 40% after eight years.

Furthermore, as a non-Portuguese asset, it is outside of Portuguese succession taxes (stamp duty).