If you are planning on moving to the Algarve, or have already moved, you have made an excellent choice. Not only is it a beautiful place to live, Portugal offers many advantages from a financial point of view.
Make the most of tax-efficient opportunities and avoid costly mistakes by considering these seven questions, ideally before you move.
1. Where will you need to pay tax?
You need to establish when you will become resident in Portugal and liable to Portuguese taxation on your worldwide income and gains.
You usually become tax resident after spending 183 days in Portugal, but it can be earlier if you have a permanent home here – you could even be considered resident from the day you arrive.
Also be wary of UK tax residence rules – just 16 days back home could unintentionally trigger UK tax residency and bring you in line for British taxes.
With careful planning and some flexibility, it is possible to time your residency switch to minimise your tax liabilities – and maximise opportunities – in both countries.
2. How much tax will you pay?
New residents can enjoy significant tax benefits for their first ten years through Portugal’s ‘non-habitual residency’ (NHR) regime. To qualify, you cannot have been resident within the last five tax years and should apply through the local tax office soon after arrival.
Besides offering a fixed 20% income tax rate to those employed in ‘high value-added’ professions, NHR lets you receive some foreign income – like UK pensions – tax-free. You could also pay no Portuguese tax on gains from UK property.
Even outside of NHR, Portugal can be highly tax-efficient for expatriates. While income is taxable at progressive income tax rates up to 48%, under certain conditions you could receive up to 85% of UK pension income tax-free. Portugal also offers opportunities to enjoy extremely favourable tax treatment on capital investments.
3. How should you hold savings and investments?
A potentially costly mistake is assuming what was tax-efficient in the UK is the same in Portugal. ISAs, for example, lose their tax-free status once you are no longer UK resident and the interest may attract Portuguese tax. Your situation and goals will change when you relocate too. It is crucial to take a fresh look at your financial planning to make sure you are suitably diversified and everything is set up in the best way for your new circumstances.
4. What is the right currency mix for you?
Once you are living in Portugal and spending euros daily, keeping savings and investments in sterling makes your income vulnerable to exchange rate fluctuations. Look for structures that let you diversify by holding investments in multiple currencies, with flexibility to choose the currency of your withdrawals and convert when rates are favourable.
5. What are your property options?
Another important issue to consider early is the tax implications of buying and selling property. When is the best time to sell your UK property or buy a Portuguese home to limit capital gains tax and stamp duty in both countries? Will you have to pay Portuguese ‘wealth tax’ on your new home? Understanding the answers could save thousands, so take care to establish your best approach.
6. What should you do with your UK pensions?
If you are planning to retire in Portugal, make sure you fully understand your pension options and the tax implications before making any decisions.
Britons living in Portugal may benefit from transferring UK pension funds into a Qualifying Recognised Overseas Pension Scheme (QROPS), or by taking a lump sum and reinvesting in more tax-efficient arrangements. However, there is no ‘one size fits all’ solution so taking regulated, personalised pensions advice is crucial.
7. Is your estate planning suitable?
In Portugal, succession law works very differently from the UK. Unless you take action, ‘forced heirship’ rules could automatically pass half of your worldwide estate to your direct family, whatever your intentions. Take care to understand your options and any tax implications.
The local version of inheritance tax (‘stamp duty’) is fixed at 10% and only applies to Portuguese assets passed on to non-family members. However, Portugal’s traditional view of the family means unmarried partners and step-children could be liable.
Note also, if you remain UK domiciled – as many expatriates are – you continue to be liable for UK inheritance tax, so you should plan to reduce this liability for your heirs.
Getting the answers to these key questions early can provide peace of mind that your financial affairs are in order so you can relax and fully enjoy your new life in Portugal. However, cross-border taxation is complicated, so take personalised, professional guidance to get the best results.
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 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.