The latest Portuguese Budget has kept tax rates and rules the same for 2021. If you are already familiar with Portuguese taxes, this makes things a lot easier! However, Brexit is one significant change this year that could bring tax implications for UK nationals and anyone with UK assets in Portugal.
Whether you have been living in Portugal for a while, recently moved, planning to relocate or just own a holiday home here, make sure you understand how Portuguese taxes may affect you in 2021.
For residents in Portugal, worldwide employment earnings, pension, rental and most other income over the year is added together to calculate your income tax bill. For non-Portuguese residents, only income sourced from Portugal is taxable here.
Portugal’s sliding scale of income tax ranges from 14.5% (on income up to €7,112) to 48% (for €80,823 and over). All seven income tax rates remain the same this year (and have actually been unchanged since 2018), and the income bands are also the same as 2020’s.
The tax rules are different for interest and investment income, such as shares, securities and bonds, which attract a flat rate of 28%. However, if you are a Portuguese resident, you have the option to pay tax at the scale rates instead if that works out cheaper for you. If a bank account or investment is within a jurisdiction classed as a ‘tax haven’ by Portuguese authorities, income is taxed at a higher rate of 35%.
Capital gains tax
All rates and rules remain the same as last year.
If you are a Portuguese resident and sell property or assets – anywhere in the world – 50% of the gain is added to your annual income and taxable at the relevant income tax rate. Crucially, however, you won’t be taxed if you sell a main home and reinvest the proceeds to buy a new main home in Portugal or elsewhere in the EU/EEA. Post-Brexit, UK property is now classed as a non-EU/EEA asset, so you can no longer receive this exemption if reinvesting proceeds into a main home in the UK.
Retirees or residents aged over 65 can avoid Portuguese capital gains tax when reinvesting into an eligible insurance contract or pension fund – great news for downsizers. You must do this within six months of sale to qualify.
Meanwhile, non-residents face a flat 28% charge on 100% of any gain from Portuguese assets.
Non-habitual residence (NHR)
Portugal’s NHR regime continues to offer new residents highly attractive tax benefits for their first 10 years here. If you have recently moved to Portugal and not been resident within the last five years, apply at your local tax office to lock in these significant benefits.
Under NHR, most foreign income, certain capital gains, interest and dividends can be taken tax-free in Portugal. Key exceptions are UK government service pensions and rental income, which remain taxable in the UK. Non-habitual residents employed or self-employed in Portugal in certain ‘high added value’ professions can also benefit from a flat 20% income tax rate.
Since last year, NHR includes a flat 10% tax on foreign pension income and withdrawals (including lump sums). However, those who secured non-habitual residency before April 2020 can continue to receive most UK pension income tax-free for the remainder of their 10-year period.
Portugal’s Adicional ao Imposto Municipal Sobre Imóveis (AIMI) applies a wealth tax of sorts to high-value Portuguese property, regardless of where the owner is resident. You are only liable if your stake in Portuguese properties is over €600,000, and then only on the value above that. So, if, for example, you and your partner jointly own a Portuguese home, the property will only attract AIMI if it is valued over €1.2 million. Rates are 0.7% for individuals, 0.4% for companies, and 1% for properties over €1 million. Some companies are not eligible for the allowance.
Succession and gift tax (‘stamp duty’)
Portugal’s version of inheritance tax remains fixed at 10% and applies only on Portuguese property and assets inherited or gifted outside of the direct family. Beware, however, that unless you take action, Portugal’s ‘forced heirship’ succession law will automatically pass portions of your estate according to your bloodline, regardless of your written wishes.
Also remember that many UK expatriates continue to remain UK-domiciled, so take care to review your position regarding UK inheritance tax.
Tax planning for Portugal
It is sensible to regularly review your financial planning to ensure everything is optimised for your family’s circumstances and goals. The way you structure your assets and wealth can make a big difference to your tax bill, so take personalised, cross-border advice to make the most of tax-efficient opportunities and secure financial peace of mind in Portugal.
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 seek personalised advice.
By Adrian Hook
Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).