We all want our assets to increase in value, but how much tax will you have to pay on the gain when you come to sell your property or investments? Your capital gains tax liabilities in Portugal depend on whether you are resident, non-resident or approved under the non-habitual residents regime.
If you are resident in Portugal, you are liable to tax on gains made on worldwide property and shares (if acquired from January 1989 onwards). Gains on other personal assets are generally not taxed.
When you sell property as a resident, only 50% of the gain is liable to tax. Inflation relief is available after two years. The gains are added to your other income for the year and taxed at the income tax scale rates, currently up to 48%.
If the property was your main home and all proceeds are reinvested in another main home in Portugal or the EU/European Economic Area (where there is tax information exchange treaty in place) within 36 months after the sale or 24 months before, the gain is exempt. You have to live in the new property within six months of the end of the three-year limit.
If you own residential property in the UK, you are also liable to tax there even though you are not UK resident. The net gain arising after April 6, 2015 is added to any other UK-source income and taxed at 18% or 28%, depending on your UK tax bracket. Under the UK/Portugal double tax treaty, you will not pay tax twice since a credit will be given for the UK tax paid, although you will pay whichever amount is the larger. Such gains may be exempt in the UK if you meet the conditions for private residence relief.
Tax at a flat rate of 28% is levied on gains on shares, which also applies to mixed or closed (private subscription) funds. Gains on shares in a blacklisted jurisdiction are taxed at 35%. Capital gains on UK shares may only be taxed in the country of residence, so in Portugal in this case.
There are ways to reduce your tax liability depending on how the gains on your assets are calculated, but you should take advice from an expert in tax on how this works.
If you are resident under the non-habitual resident (NHR) regime, a gain is ‘exempt with progression’ in Portugal if it may be taxed in the country of source. However, this means that such gains are added to your overall taxable income, and then the tax on this is deducted from the overall liability. Effectively, this means the tax rate on any income or gains that are directly taxable in Portugal may be increased. This applies to gains on the sale of UK property as a non-habitual resident since the gain may be taxed in the UK under the UK/Portugal tax treaty.
In contrast, capital gains on shares may only be taxed in the country of residence, so gains are not exempt in Portugal even under the NHR regime.
Non-resident individuals pay tax on 100% of the gain from the sale of a property in Portugal at 28%. Non-resident companies are subject to Portuguese corporation tax on 21% plus municipal surcharges.
An EU resident may choose to be taxed as a Portugal resident, but you will have to declare your worldwide income to calculate the marginal rate of tax that will apply to the gain. The same applies if you are resident in an EEA state which has a tax treaty with Portugal.
For UK residents, the gain would also be taxable in the UK, but tax paid in Portugal can be credited against the tax due in the UK.
If you hold investments within a life insurance policy in Portugal, it is not liable to capital gains tax but you will be taxed on the gain element of any withdrawal or if you cash it in. You do not have to pay tax on the proceeds if you sell or assign the policy. In fact, certain types of policies can offer significant tax benefits in Portugal. You should speak to a specialist wealth manager about which ones may help you and how.
A good adviser will help you find tax-efficient, compliant ways of managing your assets so that you do not pay more tax than you need to – there can be capital gains tax advantages to living in Portugal. Always seek professional advice before making any changes to your investments and tax planning.
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; an individual is advised to 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.