It can be very tempting to hold onto what is familiar, particularly when it comes to investments, but familiar is not necessarily the right option. You may have owned ISAs and Premium Bonds for years, but should you continue to hold them once you are tax resident in Portugal?
The Portuguese tax regime is very different from the UK’s. You need to understand how all your savings and investments are taxed here, and consider if you should move them into new arrangements to reap the tax benefits of living in Portugal.
Standard tax treatment in Portugal
■ Premium bonds and ISAs
As soon as you become tax resident in Portugal, you lose the tax incentives offered to ISAs and Premium Bonds in the UK – both are fully taxable here.
Any Premium Bond winnings are added to your other income for the year and taxed at the scale rates of income tax.
In 2017, these range from 14.5% for income up to €7,091 to 48% for income over €80,640. A solidarity tax of 2.5% or 5% is payable for income over €80,000, and €250,000 respectively. A further surtax (0.25% to 3.21%) has been imposed in recent years, though 2017 is the last year it will apply.
Income and gains from ISAs are also fully taxable in the hands of Portugal residents. They can be taxed at the scale rates of income tax or a flat rate of 28%.
Some expatriates mistakenly think that since these are tax-free UK investments they do not need to be declared in Portugal, but they most certainly do. It is important to ensure you declare assets and pay tax in the right country. With the global automatic exchange of information regime now in force, the Portuguese authorities will soon find out if you do not.
■ Bank interest
Worldwide bank interest is taxed at 28% in Portugal.
If the bank account is held in a jurisdiction on Portugal’s blacklist of ‘tax havens’, the tax rate jumps to 35%. Jersey and the Isle of Man were recently removed from the list, after they signed Tax Information Exchange Agreements with Portugal.
■ Dividends and capital gains
The tax rate applied in Portugal to dividends and capital gains on the sale of shares, securities and bonds is 28%.
Where dividends are paid by an EU company, or one with a permanent establishment in the EU, you can claim a 50% deduction. In this case, you have to pay income tax at the scale rates, not only on dividends but on all investment income (including bank interest).
■ UK property
Rental income from UK (and other worldwide) properties is also taxed at 28% in Portugal. Under the terms of the UK/Portugal double tax treaty, it also remains liable to tax in the UK. You can offset tax paid in the UK against the Portuguese tax on the same income.
If you sell your UK property as a resident of Portugal, you are liable to Portuguese tax on 50% of the gain. The taxable amount is added to your other income for that year and taxed at the scale rates.
Tax treatment under the non-habitual resident (NHR) regime
If you have not been tax resident in Portugal for any of the previous five years, you are eligible to apply for the non-habitual resident regime and benefit from significant tax advantages.
In general, income like dividends, interest and rental income from a UK source will be exempt from tax in Portugal. This is because the income may be taxed in the UK (under the terms and conditions of the NHR regime).
So even though in practice UK dividends are unlikely to be taxed there because of the disregarded income rules, since they may be taxed in the UK they are tax free in Portugal under the NHR regime.
Capital gains on shares, however, are only taxed in the country of residence under the UK/Portugal tax treaty. Since they are not taxable in the UK they are not exempt in Portugal.
When it comes to selling a UK property, gains are taxed in the country where the property is located. As a UK property may be taxed in the UK, it will not attract tax in Portugal for non-habitual residents – this would be the perfect time to sell UK property and escape capital gains tax completely.
This special NHR status only lasts 10 years, so you need to plan ahead to make your assets as tax efficient as possible once it expires.
There are some very tax-efficient investment arrangements available to residents of Portugal. With specialist advice, you can enjoy very favourable tax treatment on your capital investments and pension income. Speak to an adviser who can advise on both Portugal and UK tax and provide integrated tax and investment advice.
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 Adrian Hook
|| [email protected]
Adrian Hook is a Partner of Blevins Franks and has been providing holistic financial planning advice to UK nationals in the Algarve since 2007. Adrian is professionally qualified, holding the Diploma for Financial Advisers.