If you have moved to the Algarve or are planning to relocate, you will appreciate it is a beautiful place to live. With careful planning, Portugal can offer many financial advantages too. These key considerations can help you avoid costly mistakes while making the most of tax-efficient opportunities in Portugal.
1. Where you are tax resident
Once you become resident here, you are liable to Portuguese taxes on worldwide income and certain capital gains, so you need to be prepared.
You are usually considered tax resident after 183 days in Portugal, but it can be earlier if you have a permanent Portuguese home – potentially even the day you arrive. Also beware that, under UK residency rules, you could unintentionally trigger tax residency and come back in line for British taxes again after just 16 days there.
If you plan ahead and are flexible, it is possible to time your change of residency to minimise tax liabilities – and maximise opportunities – in both countries.
2. Your Portuguese tax bill
New residents can enjoy significant tax benefits for their first 10 years through Portugal’s ‘non-habitual residence’ (NHR) regime. If you have not been Portuguese resident within the last five tax years, apply for NHR through the local tax office soon after arrival.
Besides offering a fixed 20% income tax rate to those employed in ‘high value-added’ professions, NHR lets you receive some foreign income – like UK pensions or property gains – tax-free.
Even outside of NHR, Portugal can be highly tax-efficient. While income is taxable at progressive income tax rates up to 48%, it is possible to reduce taxes on investments and pensions.
3. Structures for savings and investments
It can prove costly to assume what was tax-efficient back home is the same in Portugal. UK ISAs, for example, are taxable for Portuguese residents; meanwhile, once resident here, you can access opportunities to enjoy extremely favourable tax treatment on capital investments.
A fresh look at your financial planning can make sure you are suitably diversified and everything is set up in the best way for your new circumstances. A locally-based adviser who understands the Portuguese tax regime – including its interaction with UK rules – is best placed to recommend tax-efficient solutions for your assets and wealth.
4. The right currency mix for you
Once you are living in Portugal and your expenses are in euros, keeping savings and investments in sterling makes your income vulnerable to exchange rate fluctuations, especially with Brexit in the picture. Look for structures that let you diversify by holding investments in multiple currencies, with flexibility to choose the currency of your withdrawals and convert when rates are favourable.
5. Buying and selling property
When is the best time to sell your UK property or buy a Portuguese home to limit capital gains tax and stamp duty in both countries? Will you have to pay Portuguese ‘wealth tax’ on your new home? How can you make the most of available reliefs and allowances? Understanding the answers could save thousands in unnecessary taxes, so take care to establish your best approach.
6. What to do with your pensions
If you are planning to retire in Portugal, make sure you fully understand your pension options and the tax implications before making any decisions.
If you have a non-government UK pension, it is possible to receive pension income tax-free for 10 years as a non-habitual resident. However, make sure you understand the rules as there are limitations that could inadvertently attract Portuguese taxation.
Many expatriates benefit from transferring UK pension funds into a Qualifying Recognised Overseas Pension Scheme (QROPS), or by reinvesting a lump sum in alternative tax-efficient arrangements. Ultimately, there is no one-size-fits-all solution for a secure retirement, so regulated, personalised pensions advice is essential.
7. How your legacy will be passed on
Portuguese succession law and tax can disadvantage certain heirs if you are not prepared. Unless you take action, ‘forced heirship’ rules will automatically pass a proportion of your worldwide estate to your immediate family. While spouses and ascendants/descendants are exempt from the Portuguese inheritance tax (‘stamp duty’), other heirs – including stepchildren and siblings – could pay 10% on receiving Portuguese assets.
Beware also that you could remain UK-domiciled even after years of living abroad, putting your estate in the firing line for 40% UK inheritance tax. Good estate planning is the key to ensuring your legacy goes to your chosen heirs without attracting more tax than necessary.
With early, careful planning you can significantly reduce your tax bill and secure the financial peace of mind to relax into your new life in Portugal. Cross-border taxation is complicated, so take personalised, professional guidance – ideally before you move – for the best results.
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.
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Mark Quinn, Partner of Blevins Franks.