My wife and I took residency in Portugal in 2017 though still commuted between here and the UK.
Before coming to Portugal, I contacted HMRC with regards to my tax responsibility as I have a local government-paid pension and my house in the UK was rented out.
HMRC stated that my local government-paid pension was taxed at source and only payable in the UK and similarly my property income – because the house is in the UK, it was also only to be paid in the UK.
In October 2021, I received a letter from the IRS stating what income I had in the UK and demanding the tax in Portugal on this income. I wrote back to the IRS and explained that tax on my local government-paid pension and the income from my property must only be paid in the UK.
I put out an enquiry for an accountant that deals with expat taxation in Portugal on my local expat communication. I received many replies and chose a well-known accountancy firm in the Algarve.
I went to see an accountant there and explained my situation. The accountant immediately told me that I was wrong, and that all worldwide income was taxable in Portugal. She then submitted tax returns for 2017, 2018, 2019, 2020.
I again contacted HMRC Technical and again they reiterated that my tax was only to be paid in the UK as there is a Double Taxation Agreement between the two countries going back to 1968. This is known as the 1968 UK/Portugal Tax Convention, which covers my UK property income under Article 6 and my local government-paid pension is covered under Article 18 and are tax exempt in Portugal.
The returns for the tax were delivered to me in December 2021 and had to be paid in 15 days, a total of €18,354.
This wiped out all of my finances and put me into debt with family and friends.
My wife and I had the worst Christmas of our lives with just the little food to eat that we had left in our cupboards.
The accountant was adamant that the tax was paid here and that HMRC would refund the taxes paid in the UK in around four months.
HMRC stated categorically that because my taxes were only to be paid in the UK that there would be no refund from them.
I requested a meeting with the accountant and her boss to try to sort out this extremely distressing situation. After one-and-a-half hours, the boss conceded that they were wrong about taxing my pension but that the property was still taxable here. He stated that the 1968 Tax Agreement was worded differently in the Portuguese version.
I received a copy of this and had it professionally translated only to find that it said exactly the same as the UK version.
I have received a letter from HMRC which states that my local government-paid pension and my UK property income are only to be paid tax in the UK and I am awaiting a response from the International Taxation Authority within HMRC with regard to this matter.
As I now know after asking on my expat communication, there are a large number of expats out there who are wrongly paying tax here on the advice of their accountants. They will eventually be in the same situation as my wife and I, when HMRC retrospectively realise the situation and demand the tax for the UK. They will, like me, be taxed twice, which is the reason why there is a tax agreement to stop this happening.
This situation has severely impacted both my wife and myself. To say that we are very distressed is putting it very mildly.
Which is why we feel that this is very newsworthy for your publication for the expats who read it and for those who have been wrongly advised by accountants who appear to be for the IRS and not for the person.
Reply from Stephen Morris, Senior Tax Adviser, Blevins Franks:
Unfortunately, this situation is not uncommon in Portugal. It seems that there is a general lack of understanding of international taxation and, in particular, how two countries’ tax systems interact. However, HMRC also gave partially incorrect advice, from what has been said above.
I will explain the correct taxation of both underneath.
The items in question are, however, covered under separate articles of the Double Tax Agreement (DTA) between Portugal and the UK, signed in 1968. Therefore, we need to look at each separately.
UK source rental incomeUK law
Under UK law, rental income derived from the UK is subject to UK tax. This is in the form of income tax for individuals or corporation tax for companies. In either case, non-residence of the owner does not exempt him from the tax liability.
Double Tax Agreement
The DTA confirms that “income from immoveable property may [emphasis added] be taxed in the Contracting State in which such property is situated”. So, in this regard, HMRC were correct, i.e. that the rental income is taxable in the UK. Their error was stating that it was/is taxable only in the contracting state where it is situated. However, the DTA does not state that the income is taxed only in the Contracting State where it is situated, and that appears to be the problem here.
Under Portuguese tax law, standard residents of Portugal are taxable on their worldwide income, and this includes rental income. This includes rental income arising in the UK. Under the DTA, any UK tax paid can be claimed against the Portuguese liability on the same income. However, if the Portuguese tax is higher, the additional tax must be paid there. Unfortunately, where it is lower, no refund is due, because the tax payable in the UK is correct under its rules.
Article 22 of the DTA (Elimination of Double Taxation) confirms that credits are available in the country of which the individual is a resident.
Article 18 Governmental Functions
This article covers pensions that are considered to be “government service” pensions. This simply means that they are pensions paid by either central or local government, essentially out of their “own coffers” rather than general public funds. Accordingly, this pension income is taxable only in the UK. This should not be taxed at all in Portugal, though it must be reported.
▪ It is highly uncharacteristic for any representative of HMRC to categorically state and confirm the tax laws of another state, including Portugal. Regardless, they are incorrect in this statement for the rental income.
▪ If the individuals concerned had not been resident in Portugal in the five years prior to becoming resident in 2017, did they not qualify for non-habitual residency? This would eliminate double taxation for the duration of the scheme, ten years.
▪ I confirm that the pension income is simply not taxable in Portugal and should not be included in the Portuguese tax return.
▪ A credit should be provided in Portugal against the UK rental income tax liability. Whilst I am not aware of the sums involved, as the rules are very similar in terms of deductions, I cannot understand why there would be such a discrepancy between the UK liability and the Portuguese liability, except for currency exchange.