Cross-border inheritance-tax planning: CLIENT CASE STUDY

The clients:

“David” and “Sarah” are a British married couple in their early 60s (names will remain fictitious for the sake of this article).

They had lived in the UK throughout their lives before moving permanently to Portugal just over two years ago. They are now Portuguese tax residents and both benefit from Portugal’s original Non-Habitual Resident regime.

Having sold their main UK home and established their lives in Portugal, they assumed that becoming Portuguese residents meant their exposure to UK inheritance tax had largely ended.

Unfortunately, that was not the case.

Their combined worldwide estate was approximately £4.5 million:

The couple’s total estate is approximately £4.5 million, made up of a broad mix of pension, property and investment assets. This includes:

• David’s UK pension valued at around £1 million

• Sarah’s UK pension at approximately £500,000

• a UK residential property worth about £1.5 million

• £550,000 in UK ISAs

• £450,000 across general investment portfolios and cash

• plus £250,000 in qualifying EIS investments and £250,000 in VCT investments.

For illustration, it has been assumed that the EIS shares qualify for Business Relief, the couple have made no substantial lifetime gifts and both pensions are established in the UK.

EIS shares: Portuguese residence does not prevent UK Business Relief from applying. However, EIS status does not automatically guarantee Business Relief. The shares must satisfy the separate Business Relief conditions, normally including ownership for at least two years and continued qualification of the underlying business. On the assumed value of £250,000, full relief may be available if all conditions are met.

The misconception

David and Sarah had taken a number of sensible steps when relocating. They had:

• established Portuguese tax residence;

• obtained NHR status;

• reviewed the Portuguese taxation of their pensions and investments;

• prepared Portuguese wills; and

• arranged their retirement income.

However, they had not undertaken a separate review of their UK inheritance-tax position.

NHR is principally a Portuguese income-tax regime. It does not determine whether someone remains within the scope of UK inheritance tax.

From 6 April 2025, the UK moved from a domicile-based inheritance-tax system to one based primarily on long-term UK residence.

A person will generally be treated as a long-term UK resident once they have been UK tax resident for at least ten of the previous twenty tax years. While that status applies, their worldwide estate can remain exposed to UK inheritance tax.

David and Sarah had lived in the UK for their entire lives before moving to Portugal. They were therefore firmly within the long-term UK residence rules.

The ten-year inheritance-tax tail

For someone with David and Sarah’s extensive UK residence history, leaving the UK does not immediately bring their overseas assets outside the UK inheritance-tax net.

They will generally remain long-term UK residents for inheritance-tax purposes until they have completed ten consecutive tax years of non-UK residence.

This is commonly described as the ten-year inheritance-tax tail.

Although they had already lived in Portugal for two years, approximately eight further complete tax years of non-UK residence could be required before their personally owned overseas assets moved outside the worldwide scope of UK inheritance tax.

The precise date would need to be established separately for each spouse by reference to:

• their UK departure dates;

• the statutory residence test;

• whether split-year treatment applied;

• the first complete tax year of non-UK residence; and

• any days, homes, work or connections retained in the UK.

NOTE: A return to UK tax residence during the tail could delay or potentially reset the timetable.

David and Sarah were therefore Portuguese tax residents, but their worldwide assets remained potentially exposed to UK inheritance tax.

The pension problem

Historically, most discretionary UK defined-contribution pensions were usually outside the pension holder’s estate for inheritance-tax purposes.

That position changes for deaths occurring on or after 6 April 2027.

From that date, most unused pension funds and pension death benefits will be included within the value of the deceased member’s estate for UK inheritance-tax purposes. The legislation has been enacted through Finance Act 2026.

For David and Sarah, that potentially adds £1.5 million to the inheritance-tax calculation.

There is a further complication for British expatriates.

Even after an individual has completed the ten-year inheritance-tax tail and is no longer a long-term UK resident, pension funds held in a scheme legally established in the UK can remain within the scope of UK inheritance tax from April 2027.

Under the new rules, a non-long-term UK resident can still be exposed to inheritance tax on pension property held in a UK-established pension scheme. By contrast, a pension established outside the UK will generally not be subject to UK inheritance tax when the member is no longer a long-term UK resident.

This makes the legal establishment of each pension scheme—and not simply the location of the investment platform or adviser—critically important.

The estimated liability

Assets passing between spouses would normally qualify for the spouse exemption, assuming the relevant conditions were satisfied.

The principal inheritance-tax liability would therefore usually arise on the second death, when the combined family wealth passed to children, other relatives or non-exempt beneficiaries.

At an estate value of £4.5 million, the residence nil-rate band would be completely tapered away. The residence nil-rate band begins to reduce once the gross estate, after deducting liabilities but before exemptions and reliefs such as Business Relief, exceeds £2 million. It is withdrawn at the rate of £1 for every £2 above the threshold. It would therefore provide no benefit on an estate of this size, even where a qualifying home ultimately passed to direct descendants. The standard nil-rate band is not means-tested or tapered and remains £325,000 per person.

Assuming this is the estate on the second death, both ordinary nil-rate bands are fully available and transferable, there have been no earlier chargeable lifetime gifts, and the £250,000 of EIS shares qualify for full Business Relief, the chargeable estate would reduce from £4.5 million to £4.25 million. After deducting the combined nil-rate bands of £650,000, the estimated taxable estate would be £3.6 million, producing an illustrative inheritance tax liability of approximately £1.44 million at 40%.

If the EIS investments did not qualify for Business Relief, the taxable estate would instead be approximately £3.85 million, producing an illustrative inheritance tax liability of approximately £1.54 million.The standard inheritance-tax rate is currently 40% on the taxable part of the estate.

This illustration assumes:

• no deductible borrowing;

• no previous lifetime gifts using either nil-rate band;

• both nil-rate bands remain fully transferable;

• no charitable legacies;

• no further reliefs or exemptions;

• the EIS investments continue to qualify;

• the estate ultimately passes to non-exempt beneficiaries; and

• asset values remain unchanged.

EIS and VCT investments are not the same

David and Sarah initially regarded their EIS and VCT holdings as one category of “tax-efficient investments”.

For inheritance-tax purposes, however, the distinction is important.

Qualifying EIS shares can potentially benefit from Business Relief, normally once the relevant ownership period and qualifying-company conditions have been satisfied.

That relief is not automatic. It can be lost if:

• the company ceases to carry on a qualifying business;

• the investment is sold;

• replacement-property requirements are not met;

• the necessary ownership period has not been completed; or

• the company’s activities or structure no longer satisfy the rules.

VCT shares do not automatically receive Business Relief simply because they are held within a Venture Capital Trust.

Each investment therefore needed to be reviewed separately. Assuming that all tax-favoured venture-capital investments qualified for inheritance-tax relief could have produced a significant planning error.

Why Portugal did not remove the liability

Portugal does not currently impose an inheritance tax equivalent to the UK system.

Instead, some transfers on death or by gift can fall within Portugal’s Stamp Duty regime. Transfers to spouses, children, grandchildren, parents and grandparents are generally exempt from the 10% Stamp Duty charge, although Portuguese real estate and certain other assets can still require reporting and careful succession planning.

However, the relatively favourable Portuguese position does not prevent the UK from charging inheritance tax.

David and Sarah’s NHR status did not alter:

• their UK long-term residence status;

• the ten-year inheritance-tax tail;

• the UK situs of their British property;

• the future treatment of their UK-established pensions; or

• the inheritance-tax treatment of their UK investment holdings.

Moving to Portugal had changed where they lived and how some income was taxed.

It had not immediately changed the inheritance-tax exposure of their worldwide estate.

UK assets remain exposed after the tail

Even when David and Sarah eventually complete ten consecutive tax years of non-UK residence, they should not assume that their entire estate will then fall outside UK inheritance tax.

UK-situated assets can remain within scope, including potentially:

• UK residential and commercial property;

• certain UK bank accounts and investment holdings;

• shares in UK companies;

• assets deriving their value from UK residential property; and

• UK-established pension schemes under the rules applying from April 2027.

The completion of the ten-year tail would primarily affect their non-UK assets.

It would not automatically protect assets that continued to be situated or legally established in the UK.

The planning review

The objective was not to recommend one product or structure. It was to understand the entire estate and create a sequence of planning decisions.

1. Establish the inheritance-tax timeline

The first step was to document each spouse’s residence position separately.

David and Sarah had moved during a UK tax year. Their advisers therefore needed to establish whether split-year treatment applied and identify the first full tax year in which each spouse was non-UK resident.

A ten-year tail is measured by tax years and residence status—not simply by counting ten anniversaries from the date of moving house.

Their future UK visits also needed to be monitored carefully. Spending more time in the UK, retaining available accommodation or undertaking work in Britain could affect their residence position.

2. Review the UK property

The £1.5 million UK residential property represented one-third of the couple’s total wealth.

It would remain exposed to UK inheritance tax regardless of whether they completed the ten-year tail.

The couple therefore needed to decide whether it was:

• a long-term investment;

• a property retained for family use;

• a possible home should they return to the UK;

• an income-producing asset; or

• capital that might eventually be redeployed.

Selling the property purely to reduce inheritance tax would not necessarily be appropriate.

A sale could create UK and Portuguese capital-gains tax considerations. The couple would also need to consider investment risk, loss of rental income, currency exposure and whether they might return to Britain.

Nevertheless, retaining a £1.5 million UK property meant retaining a substantial and permanent UK inheritance-tax exposure.

3. Analyse the pensions before April 2027

The £1.5 million held in pensions was central to the review.

The analysis needed to cover:

• the legal establishment of each scheme;

• whether the benefits were defined contribution or defined benefit;

• the current death-benefit rules;

• beneficiary nominations;

• the potential inheritance-tax position from April 2027;

• the taxation of pension withdrawals in Portugal;

• the couple’s lifetime income requirements;

• the sustainability of taking additional benefits;

• the availability and suitability of any overseas pension arrangements; and

• the regulatory, investment and tax implications of a transfer.

A pension transfer should never be presented as an automatic inheritance-tax solution.

Transferring could involve:

• loss of existing guarantees or protections;

• overseas transfer charges;

• increased costs;

• different investment risks;

• restrictions on access;

• Portuguese tax consequences;

• future UK tax changes; and

• dependence on the jurisdiction and establishment of the receiving scheme.

The correct answer might be to retain the pensions, transfer some benefits, draw more during retirement or adopt a combination of strategies.

That conclusion could only be reached after full cashflow, tax and suitability analysis.

4. Reassess the ISAs

The couple continued to hold £500,000 in UK ISAs.

Although ISAs remain exempt from UK income tax and capital-gains tax, Portugal does not generally recognise the UK ISA exemption.

Interest, dividends and realised gains arising inside the ISAs could therefore be reportable and taxable in Portugal.

An ISA is also not automatically exempt from UK inheritance tax.

The review therefore considered:

• the situs of the underlying holdings;

• Portuguese reporting requirements;

• whether income or gains had arisen since the move;

• whether the existing investments remained suitable;

• whether the accounts could accept further contributions;

• the merits of retaining versus restructuring them; and

• the tax consequences of selling the underlying assets.

Simply closing an ISA would not necessarily solve the problem. The proceeds could remain exposed to inheritance tax and selling investments could crystallise Portuguese tax liabilities.

5. Identify affordable lifetime gifts

After modelling their retirement expenditure, healthcare reserve and expected income, David and Sarah could identify capital that they were unlikely to need.

Potential strategies included:

• outright gifts to family;

• regular gifts from surplus income;

• staged gifts over several years;

• support with property purchases;

• education funding;

• charitable gifts; and

• trust planning where appropriate.

Lifetime gifting could reduce the estate, but it required careful coordination.

For UK inheritance-tax purposes, many outright gifts remain potentially relevant for seven years. Gifts where the donor continues to benefit from the asset can also remain in the estate under the gift-with-reservation rules.

The Portuguese treatment of the gift must be considered as well. The recipient’s country of residence and relationship to the donor can materially affect the outcome.

The couple could not simply give away assets on paper while continuing to use or control them.

6. Consider regular gifts from surplus income

Where the relevant conditions are satisfied, regular gifts made from surplus income can be immediately exempt from UK inheritance tax, rather than requiring the donor to survive for seven years.

This can be particularly valuable for retirees whose pension, rental or investment income consistently exceeds their normal expenditure.

However, the exemption needs evidence.

David and Sarah would need to maintain records showing:

• their annual income;

• normal expenditure;

• the pattern of gifts;

• that gifts were made from income rather than capital; and

• that the gifts did not reduce their normal standard of living.

Good record-keeping was therefore part of the planning—not an administrative afterthought.

7. Review ownership between the spouses

Although David and Sarah were planning jointly, their assets were not owned equally.

The availability of exemptions and reliefs could depend on which spouse:

• owned each investment;

• held the pension;

• received the income;

• made a gift;

• died first; and

• had used previous allowances.

Transfers between spouses could potentially improve flexibility, but they needed to be reviewed against both UK and Portuguese law.

The couple also needed to ensure that their wills did not simply transfer everything to the surviving spouse without considering how this might concentrate the entire estate—and the future inheritance-tax problem—in one person’s hands.

8. Coordinate the UK and Portuguese wills

Cross-border succession planning was essential.

The couple’s UK and Portuguese wills needed to operate together without one unintentionally revoking or contradicting the other.

The review included:

• which law governed the succession;

• the EU Succession Regulation;

• any election for the law of nationality;

• Portuguese forced-heirship considerations;

• ownership of the Portuguese home;

• executors and Portuguese representatives;

• the treatment of UK property;

• pension nominations; and

• how beneficiaries would meet any inheritance-tax liability.

Tax planning that ignored the legal succession documents could fail at precisely the point it was meant to help.

9. Provide liquidity for the remaining tax

Even with careful planning, David and Sarah were likely to retain a meaningful UK inheritance-tax exposure.

They therefore considered life assurance written under an appropriate trust.

Life assurance would not reduce the inheritance-tax liability itself. It could, however, provide beneficiaries with funds to pay the tax without being forced to sell:

• the UK property;

• long-term investments;

• family assets; or

• pension investments at an unsuitable time.

Any trust arrangement would need to be reviewed carefully from both a UK and Portuguese perspective.

The potential outcome

There was no single structure that immediately removed the £1.44 million liability.

Instead, the review created a longer-term strategy:

• establish the precise end date of each spouse’s ten-year tail;

• maintain non-UK residence throughout that period;

• monitor UK visits and connections;

• assess whether the UK property should be retained;

• review the pensions before the April 2027 changes;

• identify which EIS investments genuinely qualified for Business Relief;

• distinguish those holdings from the VCT portfolio;

• restructure investments where commercially and tax appropriate;

• make sustainable lifetime gifts;

• use the surplus-income exemption where available;

• coordinate UK and Portuguese wills;

• update pension nominations; and

• insure some or all of the residual inheritance-tax liability.

The initial potential inheritance-tax exposure was approximately £1.44 million.

The eventual saving would depend on what the couple sold, retained, spent, gifted or restructured during their lifetimes.

It would therefore be misleading to promise a specific tax saving before the strategy was implemented.

What the review demonstrated was that the potential liability was significant, identifiable and capable of being materially reduced or appropriately funded.

The lesson

Moving from the UK to Portugal does not immediately take a British couple outside the UK inheritance-tax net.

For people who have lived in the UK throughout their lives, the worldwide inheritance-tax exposure can continue for up to ten consecutive tax years after leaving.

Even after that period, UK assets—and potentially UK-established pensions from April 2027—can remain exposed.

The key questions are therefore:

• When did each spouse become non-UK resident?

• When will each spouse complete the ten-year inheritance-tax tail?

• Which assets are legally situated in the UK?

• Where are the pension schemes established?

• Which investments genuinely qualify for Business Relief?

• How much wealth will the couple realistically need during their lifetimes?

• What can be gifted without compromising their financial security?

• Are their wills, nominations and ownership arrangements aligned?

• How will the beneficiaries fund any tax that remains?

David and Sarah’s biggest mistake would have been to assume that Portuguese tax residence and NHR status protected them from UK inheritance tax.

They did not.

Their most valuable planning asset was time: time to understand the ten-year tail, prepare for the April 2027 pension changes and gradually reorganise their affairs while retaining enough money to enjoy the retirement they had moved to Portugal to create.

This is an illustrative case study and does not constitute personal tax, legal, pension or investment advice. UK residence, inheritance-tax exposure, asset situs, pension establishment, Business Relief, Portuguese Stamp Duty and succession law are fact-specific. Cross-border planning should be coordinated between appropriately qualified UK and Portuguese financial, tax and legal professionals.