If you are looking for your dream home in the Algarve, enjoy the search. There are so many wonderful properties here, you will be spoiled for choice. As well as weighing up the cost of the property, however, make sure you consider the key residence and tax implications to save unnecessary taxation.
Spending time at the property could trigger Portuguese residence
If you are only planning to use your Portuguese property as a holiday home, take care to understand the residence rules.
While you are usually considered tax resident after spending 183 days in Portugal within a year, it can be earlier if you have a permanent home here – potentially even the day you arrive. Once seen as resident, you become liable for Portuguese taxes on your worldwide income and some capital gains.
With Portugal’s non-habitual residence (NHR) regime offering a decade of tax benefits to new residents, it is worth exploring whether a permanent move can actually prove more cost-effective for your family.
Portugal charges a transfer tax as well as stamp duty
On buying a Portuguese property, you are charged a transfer tax of up to 8% plus 0.8% stamp duty. You will then be subject to the Portuguese equivalent of UK council tax – Imposto Municipal sobre Imóveis (IMI) – of between 0.3% to 0.8% annually (10% where ownership is deemed to be based in a ‘tax haven’ jurisdiction).
Property can attract an annual ‘wealth tax’
If your stake in Portuguese property is worth over €600,000, you would be subject to Adicional Imposto Municipal Sobre Imóveis (AIMI) of between 0.4% and 1.5% each year. However, a €600,000 relief per person means couples with joint ownership only face AIMI on properties exceeding €1.2 million, and then only on the value above this.
You could face capital gains tax in both Portugal and the UK
When the time comes to sell a Portuguese property, Britons could be subject to capital gains tax in both countries, depending on residence.
For Portuguese residents, worldwide gains are added to other annual income and taxed at the scale rates between 14.5% and 48%. Only 50% of gain is taxable, however, and inflation relief applies after two years’ ownership.
You can be exempt if you use the proceeds from selling a main home to buy another home within Portugal or the EU/EEA – but note this may no longer apply to UK properties after Brexit. Another exemption applies if you are retired or aged over 65 and reinvest gains into an eligible insurance contract or pension fund within six months of sale.
For non-residents, 28% is payable on Portuguese capital gains; but if it proves more beneficial, those who are EU/EEA-resident can choose to pay the scale income tax rates instead. Again, eligibility for this is on track to change for UK nationals post-Brexit.
Some gains from Portuguese assets are also taxable in the UK for UK residents. While a credit is available where tax is paid twice, you will pay whichever amount is larger.
‘Enveloped’ property may no longer be tax-efficient
Recent legislation has diluted the tax advantages of holding Portuguese property through an offshore corporate structure, such as a company or trust. Since 2018, where a non-resident company’s value consists of 50% or more in Portuguese real estate, the gain on the transfer of shares may be subject to 25% Portuguese corporation tax (35% if from a ‘tax haven’).
Additionally, companies trading in properties do not qualify for the wealth tax allowance, which means many enveloped properties are liable for 0.4% on the property’s entire value each year.
If you are considering buying a Portuguese property in this way, carefully weigh the pros and cons to determine if this is the most suitable approach for you.
Your heirs could face inheritance taxes in both countries
You should also think about what taxes your beneficiaries will have to pay if they inherit the property on your death or you gift it during your lifetime. Passing on Portuguese property to any recipients other than your spouse, children or parents will incur a flat 10% Portuguese stamp duty, wherever they live.
If you remain UK-domiciled – as many expatriates do – your Portuguese property and worldwide estate would also be within firing range for 40% UK inheritance tax.
With careful planning, it is possible to significantly reduce your tax liability, not just on your Portuguese home, but on your worldwide assets, investments and pensions, for you and your heirs.
Cross-border tax planning is complex and difficult to get right, so take personalised, professional advice to secure the financial peace of mind to fully enjoy your new home away from home.
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
|| [email protected]
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.
www.blevinsfranks.com
