Eight tax-saving considerations when moving to Portugal
If you are thinking about moving to the Algarve or buying a home here, you will appreciate that Portugal is a fantastic place to live. But did you know it can also offer financial advantages?
These eight key considerations can help you avoid costly mistakes while making the most of tax-efficient opportunities in Portugal.
1. Where you are tax resident
Once you are resident in Portugal, your worldwide income and certain gains become liable for Portuguese taxation, so make sure you are prepared.
You are usually considered tax resident after 183 days in Portugal, but it can be earlier if you have a permanent Portuguese home – potentially even the day you arrive. Also, be mindful that, under UK rules, you could unintentionally trigger tax residency and come back in line for British taxes again after just 16 days’ there.
If you plan ahead and have flexibility, it is possible to time your change of residency to minimise tax liabilities – and maximise opportunities – in both countries.
2. Your Portuguese tax bill
New residents can enjoy significant tax benefits for 10 years through Portugal’s ‘non-habitual residency’ (NHR) regime. If you have not been Portuguese resident within the last five tax years, apply for NHR through the local tax office soon after arrival.
Besides offering a fixed 20% income tax rate to those employed in ‘high value-added’ professions, under NHR you can receive some foreign income – like UK pensions – completely tax-free. You could also pay no Portuguese taxes on gains from UK property.
Even outside of NHR, Portugal can be highly tax-efficient. While income is taxable at progressive tax rates up to 48%, under certain conditions you could receive 85% of UK pension income tax-free. You could also enjoy extremely favourable tax treatment on capital investments.
3. Structures for savings and investments
It can prove costly to assume what was tax-efficient in the UK is the same in Portugal. ISAs, for example, lose their tax-free status once you are no longer UK resident and become taxable in Portugal. When relocating, it is vital to take a fresh look at your financial planning to make sure you are suitably diversified and everything is set up in the best way for your new circumstances. Explore how you can take advantage of newly-available opportunities.
4. The right currency mix for you
Once you are living in Portugal and spending euros daily, keeping savings in sterling makes your income vulnerable to exchange rate fluctuations. Look for structures that let you diversify by holding investments in multiple currencies, with flexibility to choose the currency of withdrawals and convert when rates are favourable.
5. Buying and selling property
When is the best time to sell your UK property or buy a Portuguese home to limit capital gains tax and stamp duty in both countries? Will your new home attract Portuguese ‘wealth tax’? Understanding the answers could save thousands, so take time to establish your best approach.
6. What to do with UK pensions
If you are planning to retire in Portugal, thoroughly explore your options. Many British expatriates benefit from transferring UK pension funds into a Qualifying Recognised Overseas Pension Scheme (‘QROPS’), or by reinvesting a lump sum in tax-efficient arrangements for Portugal. However, there is no one-size-fits-all solution for a secure retirement, so regulated, personalised pension advice is essential.
7. How your legacy will be passed on
Portuguese succession law and tax work very differently from the UK and can disadvantage certain heirs if you do not plan ahead. ‘Forced heirship’ rules, for example, could automatically pass half of your worldwide estate to your immediate family, whatever your intentions. Spouses and ascendants/descendants are exempt from the Portuguese version of inheritance tax (‘stamp duty’), but other heirs – including stepchildren and siblings – could be liable for 10% when receiving Portuguese assets.
Remember, if you remain UK domiciled – as many expatriates are – your estate will also be subject to 40% UK inheritance tax. Good estate planning can ensure your legacy goes to your chosen heirs without attracting more tax than necessary.
8. Preparing for Brexit
While Britons are set to keep existing rights and freedom of movement until December 2020, now is the time to act – with certainty as an EU citizen, under known rules and with today’s tax-efficient opportunities. If you are serious about relocating, move sooner rather than later to lock-in benefits and secure your future in Portugal.
With early, careful planning you can significantly reduce your tax bill and have the financial peace of mind to relax and fully enjoy your new home here. However, cross-border taxation is complicated, so take personalised, professional guidance – ideally before you move – for the best results.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals are advised to seek personalised advice.
By Adrian Hook
Adrian Hook is a Partner of Blevins Franks and has been providing holistic financial planning advice to UK nationals in the Algarve since 2007. Adrian is professionally qualified, holding the Diploma for Financial Advisers.