You may consider moving to the Algarve for a healthier, more relaxed lifestyle.
But Portugal also offers much wider appeal as new residents have the opportunity to enjoy a decade of generous tax breaks through the non-habitual residence (NHR) regime.
What is non-habitual residency?
‘Non habitual’ simply means that this regime is open to people who have not lived in Portugal in recent years.
The NHR was, in fact, introduced by the Portuguese government in 2009 to attract ‘high value’ foreign residents to live in Portugal. It, therefore, offers reduced tax rates and some tax-free exemptions for your first 10 consecutive years in the country.
What are the tax benefits?
A reduced tax rate on high value Portuguese employment income
If you are employed in Portugal in a ‘high value activity’, you can benefit from a flat 20% income tax rate on this employment income. This is instead of the scale rates of tax that range from 14.5% to 48%.
You must work in one of the pre-defined scientific, artistic or technical professions to qualify.
- Tax-free foreign income
The non-habitual residence regime provides the opportunity to receive foreign income completely free of further Portuguese tax.
In general, income from investments (including dividends and interest), royalties, rents, etc., from a foreign source will be exempt from tax (but with progression) in Portugal, provided the foreign state has taxing rights.
This can apply even if the income is not actually taxed in the home country, as can happen with UK dividends.
In summary, under the NHR, British expatriates can potentially receive most UK rental income, capital gains on real estate, interest, dividends and non-Portuguese employment income tax-free.
‘Exempt with progression’ means that while the foreign income is not directly taxed in Portugal, it can be taken into account to calculate the tax rates applied to your income that is taxable in Portugal.
- Capital gains tax
When foreign assets are sold, if the double tax treaty gives taxing rights to Portugal, the gain is taxable in Portugal. If the gain may be taxed in the source country, it is exempt with progression in Portugal.
For UK assets, this means that gains made on UK shares remain fully taxable in Portugal, even if you are a non-habitual resident. However, gains made on the sale of UK real estate are exempt from tax (with progression) under the regime.
- Foreign pension income
Although foreign pension income is no longer tax free under the non-habitual residence regime, it does benefit from a flat 10% tax rate.
Considering the income tax rates start at 14.5% and reach as high as 48%, the 10% tax is still a significant advantage.
UK government service pensions are an exception as they remain taxable in the UK only.
Are you eligible for non-habitual resident status?
People of any nationality (including non-EU/EEA citizens) can potentially qualify for NHR if they have not been resident in Portugal within the previous five calendar years.
You have until March 31 of the year after you become tax resident in Portugal to apply. You need to meet Portuguese residency rules and have a Portuguese taxpayer number (NIF) to register.
What happens after 10 years?
Once you have been tax resident for 10 years, the NHR status and benefits fall away. You will be liable to tax on your worldwide income and gains at the full tax rates.
In this case, seek advice on effective, compliant, tax planning for Portugal. Make sure you’ve made the most of your NHR status. For example, you could potentially sell a UK property without capital gains charges and reinvest in a tax-efficient life insurance bond.
What other tax benefits are there in Portugal?
If you do not qualify for non-habitual residence, or your NHR period has ended, Portugal can still be a highly tax-efficient home.
With careful planning and specialist advice, there are opportunities to enjoy extremely favourable tax treatment on capital investments.
Portuguese inheritance tax (stamp duty) is very limited; at just 10%, it only applies to Portuguese assets, and spouses and children are exempt.
Portugal does have a wealth tax of sorts, but it only applies to property and rates are relatively low. It will only affect you if you own Portuguese property worth more than €600,000 (€1.2 million for couples).
Portugal has much to offer Britons looking for a relaxing – and tax-efficient – move to sunnier climes. Ultimately, the best course of action for you will depend on your individual circumstances and aims. Take personalised, regulated advice from a cross-border specialist to make sure you do what’s best for you and your family and take full advantage of suitable opportunities in Portugal.
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.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
Sharon Farrell is a Partner of Blevins Franks in Portugal.