Many UK nationals have accumulated savings and investment portfolios using an array of options such as National Savings to Individual Savings Accounts (ISAs), Personal Equity Plans PEPs) and Premium Bonds. Unfortunately, once you take up residence in Portugal, the tax incentives provided by the UK schemes fall away and the income and gains may become wholly taxable under Portuguese law.
Your investments and tax planning should be set up according to your personal circumstances and objectives. When these change you need to review your arrangements accordingly. Moving to a new country is a major change and should prompt a complete review of your wealth management to ensure it is as effective as possible for your new life.
If you are accepted as a non-habitual resident (which is open to new residents of Portugal), you receive special tax treatment and some types of investment income are exempt from Portuguese taxation for your first 10 years of residence. I will look at this more closely in a future article. This article focuses on taxation for ‘ordinary’ residents who are not eligible for the regime.
Premium Bonds and ISAs
Premium Bonds were launched 60 years ago by Harold Macmillan; today around 21 million people own these bonds. They do not provide any automatic interest earnings or capital growth, but the possibility of winning a large prize made them quite appealing. However, the prize fund has been slashed over recent years, with further cuts from this June.
One key attraction is that they have always been tax free. So even if you are lucky enough to win the £1 million jackpot, you do not pay any UK income tax on this. They are not tax free if you live in Portugal though.
As a resident of Portugal, any Premium Bond winnings will be added to your other income for the year and taxed at the scale rates of tax up to 48% (plus solidarity and surtaxes). A large win could therefore be significantly reduced by tax.
ISAs too are fully taxable in Portugal in the hands of Portuguese residents. This applies to income and gains from cash and share ISAs.
The income or gains can be taxed at either the scale rates of tax or a flat rate of 28%, and you are obliged to declare the earnings on your annual Portuguese tax return.
Some expatriates mistakenly think that since they are UK investments, and tax-free ones at that, that they do not need to be declared in Portugal. In fact they do, and with the new global automatic exchange of information regime which started this year, the Portugal tax authorities will be informed about your UK investments.
Other UK investments
You also need to look at your other UK investments, such as shares, unit trusts, OEICs and investment bonds and consider how they are taxed here, both in terms of income and capital gains. Are they the most tax efficient way of holding your capital?
Investment bonds are another vehicle people use to hold their savings. UK residents can withdraw 5% of their original investment each year with no immediate liability to UK tax. This 5% tax-deferred allowance does not extend to Portuguese residents, but these investments do have tax advantages in Portugal, though bonds set up in some jurisdictions can be less advantageous than those set up in others.
UK rental income
If you rent out property in the UK, this income remains taxable in the UK and must be reported there each year. It is also taxable in Portugal if you are resident here. The income for Portuguese purposes is calculated under local rules which, on the whole, are not as generous as the UK ones. It is added to your other income and taxed at the scale rates of tax, although the UK tax paid on this income can be offset against the Portuguese tax on the same income.
Offshore bank interest
Interest is taxed at a flat rate of 28% in Portugal. However, if the bank account is held in a jurisdiction on Portugal’s list of ‘tax havens’, the tax rate jumps to 35%. The list includes the Isle of Man, Channel Islands and Gibraltar, so if you have large funds there, you may want to investigate more tax-friendly arrangements.
There are very tax-efficient investment vehicles available to residents of Portugal. With specialist professional advice, you could enjoy extremely favourable tax treatment on your capital investments, as well as on your pension income. Speak to an adviser who can guide you on both UK and Portuguese taxation, and the interaction between them, as well as on the savings and investment options for your capital.
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
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