If 2020 is the year you are planning to move to Portugal, you have made a great choice. In the InterNations ‘Expat Destinations 2019’ survey, Portugal scored the highest in its global ‘quality of life’ index, covering factors like personal happiness, health, wellbeing and safety. Overall, it ranked as the top country in Europe for expatriate living and third in the world. Meanwhile, International Living named Portugal as the best place to retire in 2020.
While there are clearly many benefits to living here, early financial planning is crucial. These key considerations can help you avoid costly mistakes while making the most of tax-efficient opportunities in Portugal.
1. Where you are tax resident
You are usually considered Portuguese tax resident after 183 days here, 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. Remember: you need to demonstrate settled residence in Portugal before December 31 to retain the right to remain post-Brexit.
Once you are resident in Portugal, your worldwide income and certain gains become liable for Portuguese taxation, so make sure you are prepared.
2. Your Portuguese tax bill
New residents (who have not been Portuguese resident within the last five tax years) can enjoy significant tax advantages for 10 years through Portugal’s ‘non-habitual residency’ (NHR) regime. Currently, NHR offers a fixed 20% income tax rate to those employed in ‘high value-added’ professions, plus the potential to receive some foreign income – like gains from UK property and UK pensions – completely free of Portuguese taxes.
However, the Portuguese government has signalled it may water down tax benefits for new non-habitual residents once the 2020 budget is confirmed.
Even outside of NHR, Portugal can be tax-efficient, including the potential to 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, are taxable for Portuguese residents. 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.
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? Should you keep your UK property? 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 pension 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 pensions advice is essential. Beware that pension options for UK expatriates may change after the Brexit transition ends in December 2020.
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 are not prepared. ‘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 (subject to certain exemptions). Good estate planning can help ensure your legacy goes to your chosen heirs without attracting more tax than necessary.
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 life in Portugal. However, cross-border tax and estate planning is highly complex, so take personalised, professional guidance – ideally before you move – for the best results.
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
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Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).