Like many countries, Portugal imposes a capital gains tax on the sale of assets. Unlike others, it only applies to gains made on real estate and investments. This means that personal items are not taxable, and inheritances are instead only subject to a limited form of stamp duty.
Your exposure to Portuguese capital gains tax will depend on whether you are resident, how you own the asset and, with property, whether it is your main home.
Capital gains tax for Portuguese residents
Residents in Portugal are liable to tax on gains made on worldwide property and investments acquired from January 1, 1989 onwards. Gains on real estate are added to your other income for the year and taxed at the income tax scale rates from 14.5% to 48%. Shares, securities and bonds are taxed at a flat 28% rate (35% for assets deemed to be from a ‘tax haven’ – including Gibraltar and Guernsey).
The rules are actually quite generous for residents; only 50% of the gain on real estate is liable and you receive inflation relief after two years of ownership. Exemptions are also available.
Main home exemptions for residents
If you reinvest the proceeds into another main home in Portugal – or anywhere in the EU/EEA that has a tax treaty with Portugal – you will not attract capital gains tax. To qualify, you must do this within 36 months after the sale (or 24 months before) and also live in the property within six months of the three-year deadline. Note this exemption may no longer apply to UK properties after Brexit.
An additional capital gains tax relief was introduced this year. If you are retired or aged over 65, gains are now exempt if you reinvest proceeds from your main home in an eligible insurance contract or pension fund within six months of sale.
Rules for non-habitual residents (NHR)
Those with NHR status avoid liability for capital gains tax on certain worldwide gains, depending on which country has the taxing rights under the terms of the double tax treaty.
Where the gain is taxable in the source country – such as with UK real estate – there is no liability in Portugal for non-habitual residents. However, gains are added to your annual taxable income to calculate your effective Portuguese tax rate, so could increase your overall tax bill.
Conversely, as UK shares are taxable in the country of residence, gains will attract Portuguese taxation under NHR.
Capital gains tax for non-residents
For non-Portuguese residents, the full gain from the sale of a property, shares, securities or bonds in Portugal is taxable at a flat 28% rate.
EU residents can choose to be taxed at the scale income tax rates instead. As you have to declare worldwide income to calculate the relevant rate of tax on the gain, this may not be a tax-efficient approach. Again, eligibility for this is on track to change for UK nationals with Brexit.
Note that if you own Portuguese property through a non-resident corporate structure – such as a company or trust – gains have only recently become taxable in Portugal. Since January 2018, where 50% or more of a non-resident company’s value comprises of Portuguese real estate, the gain on the transfer of shares attracts 25% corporation tax (35% if from a blacklisted jurisdiction).
This only applies where the double tax treaty between Portugal and the company’s country of incorporation gives Portugal taxation rights, for example, US-owned companies. For those who are not affected, such as companies based in the UK, corporation tax is instead payable there.
Liability for UK capital gains tax
Some gains from Portuguese assets are also taxable in the UK for UK residents.
Even Portuguese residents with UK property are now subject to UK taxes on capital gains, regardless of how it is owned. Liability for residential property has been in place for non-UK residents since April 2015 but, from April 6, 2019, it also applies to UK land or commercial property.
Where tax is paid twice, the UK/Portugal double tax treaty ensures a credit can be given, although you will pay whichever amount is larger.
Reducing your capital gains tax exposure
With careful planning, it is possible to significantly reduce your tax liability. For example, certain types of life insurance policies can offer significant tax benefits in Portugal, so speak to a specialist wealth manager about which ones may help you and how.
An adviser with cross-border experience can help you find tax-efficient, compliant ways of managing your assets so that you do not pay more tax than you need to, in Portugal or the UK.
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; individual 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. www.blevinsfranks.com