What owning a slice of Portugal will cost you in tax
For many expatriates, owning a place in the sun is part of the dream retirement in Portugal. Whether it is a holiday home or somewhere permanent, it is important to look beyond the price tag and understand all the tax implications.
Imposto Municipal Sobre as Transmissões Onerosas de Imóveis (IMT) is a transfer tax payable when buying Portuguese property. Ranging from 0% to 8%, rates depend on purchase price, property type and its intended use (i.e. whether it is your main or second home).
Stamp duty (Imposto de Selo) of 0.8% is also payable on purchase. Although new developments attract a higher rate in the form of 23% VAT, this is usually included in the property price.
Annual local taxes
Imposto Municipal Sobre Imóveis (IMI) is the Portuguese version of UK council tax. Rates vary from 0.3% to 0.8% according to property type, location and age. While some exemptions are available, IMI can be doubled on vacant properties, increasing to 10% where ownership is deemed to be based in a ‘blacklisted’ jurisdiction.
Adicional Imposto Municipal Sobre Imóveis (AIMI) affects those with a share in Portuguese property worth over €600,000, regardless of residency. Rates are 0.4% for properties held by companies, 0.7% for individuals and 1% where combined property value goes over €1 million. Since January 1, 2019, an additional rate of 1.5% applies on properties over €2 million.
Relief comes via a €600,000 allowance per person deducted from the value of all Portuguese properties. This means couples with joint ownership are only liable if properties exceed €1.2 million, and then only on the value above this.
Those not eligible for the allowance pay AIMI on the full property value. However, for both IMI and AIMI, the tax authorities calculate property value using the Valor Patrimonial Tributário (VPT), which is usually lower than the actual market value.
When renting out Portuguese property, the income is always taxable in Portugal, regardless of residency.
Net rental income for residents attracts a flat tax rate of 28%. While you can choose to add rental income to your other annual income and pay tax at the normal scale rates instead, this is unlikely to be beneficial for most people.
For non-residents, tax on rental income is set at 28%, although maintenance, repair expenses and IMI may be deducted.
If you are UK resident, rental income (and capital gains) are also taxable in the UK. While you can offset the Portuguese tax paid against UK liability to avoid double taxation, expect to pay the difference if the UK tax is higher.
Capital gains tax applies when selling any Portuguese property bought after 1988.
For residents, gains are added to your other annual income and taxed at the scale rates between 14.5% and 48%, but only 50% of the gain is taxable and inflation relief applies after two years of ownership.
Residents should not face capital gains tax, however, when selling a main home and using the proceeds to buy another home within Portugal or the EU/European Economic Area (EEA). While this currently means that Britons selling a Portuguese home to reinvest in a UK property are exempt, this is on track to change post-Brexit.
Fortunately, a new main residence relief was introduced this year to widen the scope. Now, if you are either retired or aged over 65, you can receive an exemption if you reinvest gains in an eligible insurance contract or pension fund within six months of sale.
If you are non-resident, 28% is payable on all capital gains. While you are an EU citizen, you can opt to be taxed as a Portuguese resident instead but must declare your worldwide income to calculate the applicable tax rate. Take care as this may not be the most tax-efficient approach.
Other tax considerations
If you die owning Portuguese property or gift it during your lifetime, recipients other than your spouse or children will face 10% stamp duty, wherever they live. Also, UK nationals may be considered UK-domiciled and therefore liable for UK inheritance tax, even if Portuguese resident.
If renovating or extending Portuguese property, note that this could prompt revaluation by the tax authorities, potentially leading to higher ongoing IMI and AIMI charges. Bringing the VPT closer to market value, however, could provide capital gains tax benefits when selling the property.
Whether you are living in Portugal or just own property here, make sure you keep up with your tax obligations in both Portugal and Britain. It can be hard getting cross-border tax planning right, so take personalised professional advice to limit your exposure and get the most out of your home away from home.
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 Dan Henderson
Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.