Since I wrote this article, the Portuguese government has released its state budget for 2018. In spite of all the expectations, it did not include any changes to pension taxation under the non-habitual resident regime. So it does not look like the reforms outlined below will go ahead next year, though we need to wait for the budget to be finalised at the end of November to be sure.
Could the tax benefits of the highly favourable non-habitual residency (NHR) scheme be watered-down for expatriates settling in Portugal? Confirming that a review of NHR is underway, in September the Portuguese government signalled plans to start taxing foreign pensions for non-habitual residents at a rate of 5%-10%.
It was widely believed that changes would be outlined in the Portuguese state budget to take effect in the new year.
Who would be affected?
It was expected that any new tax on pensions would only apply to those acquiring NHR status from January 1, 2018. So if you had already registered for NHR – or do so before the end of this year – your benefits would be locked in and continue for the full 10 years of your initial residency.
However, it seemed likely that anyone arriving in Portugal and taking up NHR on or after this date would be liable to the new income tax of 5%-10% on foreign pension funds, including those transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS).
How does NHR work now?
You can qualify for NHR if you have not been resident in Portugal within the last five Portuguese tax years.
Britons with non-habitual residency can currently receive most UK pension income or lump sums without attracting tax for their first 10 years in Portugal. This is because NHR offers tax exemptions for many types of foreign-source income that is taxed or taxable in another country under the terms of a double tax treaty.
As the UK-Portugal tax treaty gives Portugal the taxing rights on UK private pensions, company pensions and the UK State Pension, most UK pensions qualify. As a result, it is currently possible to withdraw UK pension funds (lump sums or income) completely tax-free during your first 10 years here.
Rental income, certain capital gains, interest and dividends can also be exempt, with any UK tax deducted reclaimable. The key exceptions here are UK government pensions – including those from a local authority, the army, police, teaching, fire service and some NHS departments – which always remain taxable in the UK.
Why might this change?
Clearly, Portuguese government coffers will be boosted by extra taxation. The key motivation, however, is immense pressure from other European countries to impose taxation on expatriate retirees.
Currently, many countries with double tax agreements with Portugal – including the UK – offer tax relief to nationals during their working lifetimes on pension contributions and growth. Revenue is expected to be recovered later through income tax paid on pension withdrawals during retirement. However, this is not the case for those who move to Portugal under NHR, who can access their pensions without paying tax in either country.
Last November, the Portuguese government bowed to pressure from Finland to allow taxation of Finnish pensioners with NHR status from 2019. With intense pressure coming now from Sweden and elsewhere, Portugal’s finance minister, Mário Centeno, has pledged to standardise taxation of foreign pensions to maintain “a good fiscal relationship” with other European countries.
Portugal still offers appeal
Even with a potential tax of up to 10% on foreign pension income (still lower than many countries) – or if you do not qualify for NHR – Portugal offers some very attractive tax benefits for British expatriates.
Portuguese taxes are relatively low and there are opportunities for extremely favourable tax treatment on investments.
Local inheritance tax (stamp duty) is also relatively benign – affecting Portuguese assets only at a fixed rate of 10% for indirect family members or non-related individuals. And while UK pension income outside the NHR regime attracts the usual scale of Portuguese income tax rates peaking at 48%, in some circumstances you can receive up to 85% tax-free.
But for most people, settling in Portugal is about more than financial benefits. For those already living here, it will be no surprise that Portugal is ranked the best country in the world for expatriates’ quality of life (InterNations ‘Expat Insider’ 2017).
If you are thinking about moving here, it is a good idea to do so sooner rather than later under existing rules. Registering for NHR before the end of 2017 might still secure current benefits. Acting pre-Brexit is also advisable – the UK’s new 25% tax on QROPS transfers outside the EU/EEA could extend to transfers within the bloc once Britain sheds its EU obligations, leaving limited time to make tax-free pension transfers.
Despite potential tax changes – and Brexit – Portugal still has much to offer Britons seeking a place in the sun. Take personalised, cross-border financial advice to make the most of the opportunities available for you and your family.
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.