However well we have settled into our new lives in Portugal, most UK nationals living here maintain some British habits. Whether it is a Sunday roast, following the football or watching British soaps, there are some ties we do not want to lose.
The same often applies for UK savings and investments. While many expatriates prefer to stick with what’s familiar, just how suitable are these arrangements for Portugal?
Premium Bonds and ISAs
Launched 60 years ago, around 21 million people own Premium Bonds today. Even though they do not provide any interest earnings or capital growth – which means their value will be eroded over time by inflation – the possibility of winning a large prize continues to appeal.
According to MoneySavingExpert’s Martin Lewis, while the National Lottery offers a one-in-45-million chance of winning the jackpot, your chance of becoming a millionaire through a single Premium Bond is one-in-almost-36-billion! Even if you are happy to win £25,000, the chances are still one-in-two-billion.
Despite these slight odds, a key drawcard is that winnings have always been tax-free in the UK. However, as with ISAs, any tax-free benefits are lost when you are no longer UK resident. What’s more, once you are resident in Portugal, any bond winnings or ISA interest and dividends become taxable here.
Investment income for Portuguese residents is taxed at a flat rate of 28%, but you can opt to pay tax at the scale rates if that proves more beneficial. In this case, the income would be added to your other income for the year and taxed at rates ranging from 14.5% for income up to €7,091 to 48% for income over €80,641.
Similarly, although bank interest in the UK is tax-free under a certain threshold for UK residents, it is taxable for Portuguese residents. Again, bank interest is either taxed as investment income at 28% or at the scale income tax rates.
UK shares, securities and bonds
UK investments such as life assurance bonds, unit trusts and open-ended investment company (OEIC) funds can offer tax relief and other advantages while you are in the UK. For example, long-term UK residents benefit from a 5% tax-deferred allowance on UK investment bond withdrawals.
Once resident in Portugal, however, investments such as these become subject to the flat 28% tax rate and also Portuguese capital gains tax when sold. Gains are added to your other income for the year and charged at the relevant Portuguese income tax rate, with inflation relief available after two years.
Tax benefits for non-habitual residents
Under the NHR scheme, certain foreign income and gains that may be taxed in the source country (under tax treaty rules) are exempt from tax in Portugal.
UK bank interest and dividends are taxable in the UK (under the UK/Portugal double tax treaty), so do not attract Portuguese taxes for non-habitual residents. This is the case even if the income is not actually taxed in the UK, as can happen under ‘disregarded income’ rules.
As a result, those benefitting from the non-habitual residence regime can receive UK dividends and bank interest completely tax-free – but should note that gains on the sale of UK shares will always be taxable in Portugal.
Highly tax-efficient investment options are available to residents of Portugal. For example, many expatriates benefit from holding capital in a structure similar to an offshore life assurance policy or bond that acts as an investment wrapper to a conventional portfolio.
The rules differ from the UK to Portugal, but the basics remain the same – no tax is payable on the underlying investment income (interest, dividends and gains) until a withdrawal is made. While there is no 5% allowance as in the UK, only a proportion of the profit is taxable and the effective rate of tax drops over time.
For the best results, speak to an adviser who can guide you on both UK and Portuguese taxation, the interaction between them and tax planning opportunities.
It’s not all about tax
There are other compelling reasons to regularly review how your savings and investments are structured. Crucially, you need to ensure they meet your income and currency requirements as well as your current objectives, time horizon and risk tolerance. Unfortunately, many people have portfolios which do not work as hard as they can and are no longer suitable for them.
With opportunities to enjoy extremely favourable tax treatment on your capital investments in Portugal, breaking old habits here can prove profitable, so take time to explore your options.
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 seek personalised advice.
By Dan Henderson
Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.