The Algarve offers great appeal for anyone looking for a relaxed lifestyle in the sun, but did you know you could potentially enjoy a decade of generous tax breaks – including tax-free UK pension income – by moving here?
Since 2009, Portugal has actively encouraged new arrivals to settle permanently by offering extremely favourable tax benefits through the special non-habitual residence (NHR) tax regime.
Benefits for those working in Portugal
If you are employed in Portugal, you could potentially benefit from a flat 20% income tax rate under non-habitual residence – a significant reduction on the usual scale rates that reach up to 48%. To qualify, you would need to work in one of the pre-defined ‘high value-added’ scientific, artistic or technical professions.
However, you do not have to be employed to be eligible for NHR, so the regime can also be highly beneficial for retirees and other expatriates.
Benefits for those receiving foreign income
Under NHR, most income from a foreign source is exempt from Portuguese taxation for 10 consecutive years, as is income that is taxable in another country. This means that British expatriates can potentially receive most UK pension income, rental income, capital gains on real estate, interest, dividends and non-Portuguese employment income tax-free.
The good news is that this can apply even if the income is not actually taxed in the home country. UK dividends, for example, (excluding gains on UK shares) escape Portuguese taxation under NHR because they are taxable in Britain under the UK/Portugal double tax treaty. But in practice, thanks to the UK’s ‘disregarded income’ rules for non-residents, you could end up paying no tax – in either country – on UK dividend income.
Benefits for retirees
Under NHR, most UK pension income – including from private pensions, company pensions and the State Pension – will not be taxed. The exceptions here are UK government pensions (including local authority, army, police, teaching, fire service and some NHS pensions) which always remain taxable in the UK.
So if you take your non-government UK pension as regular income, you can generally do so as a non-habitual resident without being taxed in either country. Take care, however, as a recent rule change means you may be subject to Portuguese income tax if you withdraw your entire UK pension fund as lump sum payments over a period of less than ten years.
Will Brexit affect NHR benefits for UK nationals?
Fortunately, no! People of any nationality (including non-EU/EEA citizens) can qualify for NHR if they have not been resident in Portugal within the previous five calendar years. You do need to meet Portuguese residency rules to be eligible, however, so it will be much easier to apply as an EU citizen with full freedom of movement. Currently, you can acquire Portuguese residency by spending at least 182 days a year in Portugal or having your main home here.
Although Brexit itself will not affect Britons’ eligibility for NHR, domestic tax rules could change anytime, anywhere. It is also possible that the UK government may seek exemptions to increase taxation of Portuguese-resident nationals post-Brexit.
So, if you have recently arrived in Portugal – or are thinking about making a permanent move – register for NHR with the Portuguese tax authorities as soon as possible to make sure you lock-in today’s benefits.
Taxation in Portugal outside of NHR
Even if you do not qualify for NHR, Portugal can still be a highly tax-efficient home.
While UK pension income outside NHR attracts the usual scale Portuguese income tax rates from 14.5% to 48% and investments are liable to a flat 28% rate, there are opportunities to enjoy extremely favourable tax treatment on investments. If you qualify for NHR, you may further benefit from combining these structures with the regime rules. For example, you could potentially sell a UK property without capital gains charges and reinvest in a tax-efficient life insurance bond.
There is a wealth tax of sorts, but rates are relatively low and it only affects those whose ownership of Portuguese property is worth more than €600,000 (€1.2 million for couples). Portuguese inheritance tax (stamp duty) is also limited; at just 10%, it only applies to Portuguese assets, and spouses and children are exempt.
Careful and early financial planning is the key to securing the best approach for you and your family, tailored for your particular circumstances and goals.
Cross-border tax, wealth management, pensions and estate planning is complex, so take specialist, personalised advice to make sure you do not miss out on any suitable opportunities and take full advantage of all that Portugal has to offer.
The 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 take personalised advice.
By Mark Quinn
Mark Quinn, Partner of Blevins Franks.