Many of us see the New Year as an opportunity to assess our financial affairs, including tax planning. It is a good time to make sure everything is in order, and the first step is to confirm what your tax liabilities are in Portugal, before you move on to establish the most tax-efficient way to hold your assets. This article focuses on capital gains tax.
Residents of Portugal pay tax on their worldwide capital gains. Most gains on personal assets are not taxed, but gains on property and shares are liable.
Portuguese residents selling property pay tax on 50% of the gain. 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 of up to 48% (2015 rates, the 2016 rates are not yet confirmed).
If the property was your main home and all the proceeds are reinvested in another main home in Portugal or the EU/European Economic Area within 36 months after the sale or 24 months before, the gain is exempt. You will have to live in the new property within six months.
Remember, if you own residential property in the UK, you will also have to pay tax there if you sell it, 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 income tax bracket.
However, under the UK/Portugal double tax treaty you will not pay tax twice, as 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 includes units in collective investment schemes. Note that gains on shares in a blacklisted jurisdiction (including Isle of Man and Channel Islands) are taxed at 35% instead of 28%. 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 tax bill, 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.
For those with UK property and shares this means that gains on UK properties are exempt with progression, and gains on UK shares are fully taxable in Portugal (as the double tax treaty gives taxing rights on share gains solely to Portugal).
Non-residents pay tax on 100% of the gain from the sale of a property in Portugal at 28%. 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.
For UK residents, the gain would also be taxable in the UK, but under the double tax treaty, any 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 proceeds 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. 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 Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com