How are British Expats in Portugal affected by the UK Budget?

One of the most impactful changes is the 40% inheritance tax on unused pension funds upon death, set to take effect from April 2027. For affluent British expats, this adds complexity to passing wealth on to family members, underscoring the need for efficient planning.

In response, many UK expats in Portugal with Non-Habitual Residency (NHR) tax status are opting to draw down their UK pensions at 10% to pre-empt potential inheritance issues in the UK. This measure represents a tax increase on pension funds, but effective financial planning can help to offset its impact.

Paul Stannard, Founder of and Chairman at Portugal Pathways said: “In the last few days, we have seen an influx of affluent UK expats in Portugal and the UK requesting meetings to expedite and accelerate moving their income and assets to European-based investment structures, such as insurance bonds. These are very tax-efficient in Portugal, as fears grow about capital gains costs for entrepreneurs and inheritance tax increases.”

He adds: “The latest UK Budget really highlights the importance of securing income and assets through early, long-term planning with regulated international cross-border advisors who can provide insights from both UK and Portuguese tax and wealth management perspectives.”

Matthew Watkins, a British expat residing in Portugal, said the Budget had made him act sooner rather than later.

He explained: “I have been thinking for some time about moving my UK pension into a European-regulated life insurance bond with the help of one of Portugal Pathways’ wealth management partners. I don’t mind paying tax, but paying it twice over feels totally unreasonable when I have worked all of my life to enjoy my retirement in Portugal.”

The budget also brings changes to the Overseas Transfer Charge, adding financial complexity for UK pensions in payment. This measure aims to prevent UK residents from exploiting double tax-free allowances abroad and to reduce risks of transferring tax-relieved pension savings out of the UK.

For affluent British expats in Portugal, this adjustment could introduce currency exchange risks, affecting pension transfers and income stability. This requires clients to consider the impact of currency fluctuations on pension income versus the 25% charge on pensions transferred out of the UK.

British entrepreneurs and value creators are also notably affected by the Budget changes. Capital gains tax on disposals made on or after October 30, 2024, has increased, rising from 10% and 20% (for assets other than residential real estate or carried interest) to 18% and 24% respectively.

For UK families and entrepreneurs affected, there remains an opportunity to secure NHR tax status before it closes to new entrants at the end of the year, to be replaced by the NHR 2.0 tax regime.

The new NHR 2.0 tax regime in 2025 is expected to favour entrepreneurs and investors in innovation and high-skilled professions, it won’t however, offer the same low tax benefits for pensions.

As these changes unfold, wealthy UK expats in Portugal are encouraged to act now to protect their assets and income, especially if they currently benefit from the NHR tax regime. With inheritance taxes on pension funds potentially increasing, now is the time to reassess financial plans.

Paul Stannard highlights the necessity of a proactive approach: “Expats who are informed, prepared, and take early action will be best positioned to navigate these changes."

About Portugal Pathways

Portugal Pathways provides expert guidance on luxury property, wealth management, residency by investment (Golden Visa), tax optimisation, private healthcare, and bespoke relocation solutions to enhance your lifestyle and investments in Portugal.