Is it time to consider downsizing your home?

Portugal offers fantastic property opportunities in outstanding surroundings, so it is unsurprising that many Britons choose to retire to their own place in the Algarve.

Whether you buy your main home here or just for somewhere to holiday, property may be your biggest asset, with the potential to provide a substantial return on your initial investment over time. For many, their home is also a legacy to help secure the financial future of children and other heirs.

However, there are risks in relying on bricks and mortar for your wealth. After all, you cannot fully realise the financial benefits of a property while you are still living in it. Compared to other investments, property can also prove very costly to maintain.

 Size does matter

Generally, the larger the property, the more expensive the running costs. Mortgage payments, rates, utility bills, maintenance expenses can all add up to generate a relatively high ongoing burden. If you are retired with a reduced income, this can be especially draining on your resources.

 Affording retirement

With today’s increased life expectancy, you may need your existing wealth to stretch to 10, 20, or perhaps 30-plus years in retirement. Are your pensions and investments on track to sustain the lifestyle you want for as long as you need? Are they structured to protect you from long-term inflation and provide the increased income you may need in the future as the cost of living rises?

Many people find themselves in an ‘asset rich, cash poor’ situation, owning considerable physical wealth such as property but with substantially less disposable income. Expatriates may also hold on to UK property in addition to their Portuguese home.

While property can be a solid investment, it locks your money away in a highly illiquid way. If you want access to your capital, you may not be able to sell easily, nor for the right price. Also, there is risk in tying your funds up in one asset class.

Property offers potential leveraging opportunities, but, like any debt arrangement, this comes with costs and risks. For retirees looking to shed debt and leave something behind for family, more borrowing is not the answer.

Benefits of reinvesting your capital

Downsizing property can help increase your accessible wealth, but it needn’t be a compromise when it comes to investment growth. By reinvesting in suitable investment funds, for example, you can still invest in real estate if you wish, but alongside other assets (equities, bonds etc.) to reduce risk through diversification. Unlike immoveable property, if you require small amounts of cash, you can just sell the amount you need, not the whole investment.

A specialist adviser can help you explore investment arrangements that suit your circumstances, goals and risk appetite while being tax-efficient for Portugal. You could unlock other benefits such as a regular income and currency flexibility.

Releasing capital from UK property

Expatriates in Portugal can benefit from tax exemptions on the sale of UK property. If you qualify for ‘non-habitual residence’ (NHR), you can sell UK property without attracting capital gains tax here for your first 10 years. For other Portuguese residents, only half the gain is liable at the income tax scale rates up to 48%. However, if you sell your Portuguese main home and reinvest the full proceeds into another main home here, you are exempt from capital gains tax.

If you are retired or aged 65+, you can also avoid Portuguese capital gains tax by reinvesting some or all of the gain from a main home into an eligible insurance contract or pension fund within six months.

With Portugal offering highly beneficial opportunities for residents with capital to invest, it is worth reviewing your options with expert guidance.

Reducing taxation

Wherever your home is, charges such as stamp duty and capital gains tax generally increase with its price tag. Higher-value homes can also tip you over the threshold for wealth tax, as well as increasing the inheritance tax bill for your heirs.

Portuguese property attracts annual wealth taxes of between 0.4% and 1.5% if valued over €600,000 (€1.2 million if jointly owned), regardless of where you are resident.

Wealth tax rates seem relatively low, but when applied to property values, this can add thousands to your tax bill. By reducing the amount of tax payable, you can make your money go further in your lifetime and maximise the value of your legacy.

Ultimately, while you want to make sure your family are looked after when you are gone, do not forget your own needs. Take personalised, cross-border advice to establish an investment and estate planning strategy that can secure a retirement for you in Portugal today and a lasting legacy for future heirs.

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; individuals should seek personalised advice.

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By Sharon Farrell
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Sharon Farrell is a Partner of Blevins Franks in Portugal.