If you own, or are thinking of buying, property in Portugal, you need to be aware of all the tax implications and what your tax liabilities are, both in Portugal and your home country if you are not resident here. These vary depending on where you are tax resident and whether the property is your main home, a holiday home or an investment.
Tax on rental income
If you own and rent out a Portugal property, the income is always taxable in Portugal, whether you are resident here or not.
If you are resident here, your net rental income is subject to tax at a flat rate of 28%. You also have the option of adding rental income to your other income for the year so it is taxed at the normal scale rates. However, with rates up to 48%, this only benefits those on the lowest tax rate.
Non-residents always pay tax at 28%, and the letting agent must deduct this from the gross rent.
Maintenance and repair expenses may be deducted from rental income if they are documented, as can municipal property tax (IMI).
If you are UK resident, the income will also be taxable in the UK. Both countries will apply their own rules to calculate the tax, so the taxable amount is likely to be different in each country. You can offset the Portuguese tax actually paid against the UK liability to avoid double taxation, but if the UK tax is higher, further tax will be due in the UK.
Capital gains tax
Looking ahead, when you come to sell your Portuguese property, capital gains tax will be due on the gain (unless acquired before 1989). Residents of Portugal pay tax on only 50% of the gain and, if held for more than two years, inflation relief is given. The gains are added to your other income for the year and taxed at the scale rates of up to 48%.
Gains on disposal of the main home are exempt for residents, providing the entire proceeds (net of any mortgage taken out to acquire the property) are reinvested in another main home in Portugal or the EU/EEA within 36 months after date of disposal or 24 months before. You will have to live in the property within six months.
Non-residents pay tax on the whole gain at the rate of 28%. An EU resident may opt to be taxed as a resident in Portugal on such a gain – but you will have to declare your worldwide income in Portugal to calculate the marginal rate of tax that will apply to the gain.
For UK residents, the gain would also be taxable in the UK, but as with rental income, under the terms of the double tax treaty, any tax paid in Portugal by UK residents can be credited against the tax due in the UK.
If you die owning the property, or gift it during your lifetime, Portuguese stamp duty will apply regardless of your residence position. Spouses and children are exempt. The rate is 10% and is paid by the recipient, even if they do not live in Portugal.
If you are a UK domicile, as most British expatriates are, your Portugal property, along with other Portuguese assets, will form part of your estate for UK inheritance tax purposes.
Local and transfer taxes
A transfer tax, known as IMT, is payable by the buyer on the purchase of a property. The rate payable depends on the ultimate use of the property and whether it is your main or second home.
In addition, stamp duty at 0.8% is payable by the purchaser unless the sale is subject to VAT at the standard rate of 23%, which is charged on new buildings.
Stamp tax of 1% is also payable on all residential buildings worth €1m or more.
Then there is IMI, which is the annual municipal property tax payable by whoever is the owner at December 31 that year. It is based on the registered value of the property and fixed by each municipality. The rates range from 0.3%-0.8%, depending on the type, location and age of the property, although there are some exemptions available. For properties owned by individuals or companies resident in blacklisted jurisdictions, IMI is 7.5%.
It can be hard getting tax planning right in one country, it is even more complicated if it involves two different tax regimes. Whether you are living in Portugal or just own property here, UK nationals should seek advice from someone who is experienced in both Portugal and UK taxation and how they interact. Specialist, personalised advice will ensure you do not get caught out by unexpected taxes, and that mitigate taxation where possible.
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; an individual is advised to seek personalised advice.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com
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