Are you buying or selling a property in Portugal? Whether you are buying your first home here, or downsizing or leaving the country, it is important to understand the Portuguese capital gains tax rules on the disposal of property.
How much tax you pay will depend on whether you are resident, or selling while under non-habitual residence status, and whether you can benefit from the roll-over relief.
Portugal residents
Residents are subject to Portuguese capital gains tax on worldwide real estate gains.
Only 50% of the gain is taxable and, after owning the property for two years, you are eligible for inflation relief. Property acquired before 1989 is not taxed.
The taxable amount is added to the other income you earn that year and taxed at the scale rates of income tax, currently ranging from 14.5% (for income under €7,479) to 48% on income over €78,834.
Main residence reliefs – the rollover rules
When you sell a property that has been your main home, you may escape capital gains tax completely depending on circumstances and what you do with the proceeds.
There are two reliefs available (both can be claimed):
- Reinvestment in a new main home
The gain on the sale of your main home in Portugal is exempt from capital gains tax if the proceeds (net of any mortgage taken out to acquire it) are re-invested in another main home.
- You must declare the amount you intend to reinvest on your tax return for the year the property is sold.
- The new home must be in the EU (including obviously Portugal) or a European Economic Area (EEA) country which exchanges tax information with Portugal.
- You need to purchase your new residence within 36 months after selling the first one or 24 months before, and live in it within six months of the three-year limit. Otherwise, any tax payable will become due (with penalties and interest). Reinvestment in land to build the new home qualifies.
- The entire proceeds must be reinvested. This includes estate agent fees, legal and other incidental costs, so some tax is usually payable.
- The property must be in your name, and not in a company. It’s advisable to have ‘history’ in it. E.g., being registered as your address with the local authority, utility companies and on tax returns.
-
Reinvestment in a long-term savings plan/pension
Gains made on the sale of your property may also be tax free if you are of retirement age and re-invest the proceeds into an insurance contract or pension.
- You (or spouse/partner) must be retired or over 65.
- The sale proceeds are invested in a pension fund, state pension system or insurance contract within six months.
- When reinvesting in a pension, you must receive a maximum annual payment of 7.5% of the value of the funds (speak to your accountant/lawyer to confirm you qualify).
- Indicate your intention to invest the funds in your tax return for the year concerned.
- The property needs to be in your name.
Life assurance policies – where you can hold a wide range of investment assets within its tax efficient structure – are eligible for this relief.
If you sell your home to buy a smaller, lower value property, you can invest the unused balance in a life assurance policy and benefit from the exemption.
Non-residents
Under Portugal’s current law, non-residents selling Portuguese property are taxed on the entire gain.
Individuals are taxed at 28%. Companies are subject to Portuguese corporation tax of 25% while companies located in a tax haven are taxed at 35%.
If you are resident in an EU or EEA state, you may opt to be taxed as a Portugal resident. This only benefits those with very low income.
This situation is evolving. The Portuguese Constitutional Court and European Court of Justice have confirmed that this different treatment is discriminatory under EU law. The Portuguese law has not been changed yet, but the Portuguese tax authority is reportedly already treating residents and non-residents in the same way.
Non-habitual residents (NHR)
Those with NHR status avoid liability for capital gains tax on certain foreign source gains, depending on which country has the taxing rights under 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 NHR residents.
Gains are ‘exempt with progression’, so are still added to your annual taxable income to calculate your effective Portuguese tax rate.
Tax planning
As is usually the case with taxation, what may initially appear simple turns out to be more complex in practice, so it’s a good idea to take personalised, professional advice from a local adviser. They can also recommend tax-efficient ways to hold your assets and ensure your arrangements are suitable for you.
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.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
By Sharon Farrell
|| [email protected]
Sharon Farrell is a Partner of Blevins Franks in Portugal.
www.blevinsfranks.com
