Are you moving to Portugal this year?
If 2019 is the year you are planning to move to Portugal, you have so much to look forward to. There is a long list of benefits to living here. In the “Expat Destinations 2018” carried out by InterNations, Portugal came second in the “quality of life” index covering factors like personal happiness, health and wellbeing, safety and leisure options. It had the highest placing among European countries in the “top expat destinations” index and was sixth overall (out of 68 countries).
You will have a long list of tasks to work through to be ready for the big move, but do not overlook reviewing your tax and financial planning. The Portuguese tax and succession regimes are completely different from the UK’s, and you also need to review your investments and pensions to see if they should be adapted for your new life.
So, it is worrying that a survey (carried out by Old Mutual International and given to International Adviser) found that only 27% of UK residents planning to move abroad have taken financial advice. While we can do a lot of research online, cross-border tax and estate planning are complex. You have to learn all the intricacies of a foreign regime and understand how it interacts with the various UK rules.
This takes specialist knowledge and omitting to take professional guidance could well result in you paying more tax than necessary and your wishes for your heirs not being carried out as you had hoped.
Escaping UK tax
When it comes to tax planning, the first step is to familiarise yourself with the rules which determine where you are resident for tax purposes.
Generally speaking, you are considered a Portuguese tax resident once have spent 183 days in the country in a 12-month period. You can also be deemed resident if you have a ‘permanent home’ in Portugal and you intend to keep and occupy it as such, even if you spend less than 183 days here.
The UK’s Statutory Resident Test has a list of criteria that would make you liable for UK taxation, so you need to follow both countries’ regulations and, where necessary, the tie-breaker rules set out in the Portugal/UK double tax treaty.
If you are resident in Portugal (and not a non-habitual resident, see below) you are liable to Portuguese tax on worldwide income and, to some degree, on capital gains. Ancillary taxes such as property rental tax, tax on the transfer of real estate, stamp duty and VAT are also often payable.
You will need to review your tax planning arrangements, as those which were tax-efficient in the UK probably do not offer the same benefits in Portugal. Review the way you hold your assets to take advantage of the opportunities Portugal has to offer.
Portugal’s Non-Habitual Resident regime (NHR)
As a new arrival in Portugal, you could be eligible for the special Non-Habitual Resident regime. This offers beneficial tax treatment for your first 10 years of residence.
There is a special tax of 20% applicable to employment and self-employment income derived from certain ‘high added value’ activities, and the regime offers a potential tax exemption for most foreign-source income, providing certain conditions are met.
It is certainly worth exploring if you are moving to Portugal, but take professional, personalised advice to establish what would work best for you.
The domicile/UK inheritance tax issue
The above tax residence rules do not apply to domicile and UK inheritance tax. While being resident in Portugal will make you liable for Portuguese income tax instead of UK tax, the same does not apply to UK inheritance tax. This is because it is based on domicile rather than residence, a much more permanent concept. Many British expatriates remain UK domiciled even though they live in Portugal for many years.
So, your heirs would be liable for both Portugal stamp duty (their inheritance tax equivalent) and UK inheritance tax. The good news is that stamp duty is very limited – just 10%, and spouses, ascendants, descendants and non-Portuguese assets are exempt – but specialist estate planning remains essential if you wish to reduce your inheritance tax liability for your family and heirs.
Savings, investments and pensions
These should all be specifically designed around your personal circumstances and objectives, which change with a move from one country to another. What may be tax-free in one country could trigger taxation in another, so it is important to review and adjust your arrangements accordingly.
It is never too early to start planning. Take advice from a firm with a presence in both Portugal and the UK, which can offer highly personalised, cross-border holistic wealth management.
The 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 should 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.