There are so many benefits to living in the Algarve – the lifestyle, the people, the food, the weather, the stunning coast and countryside, the list is endless. And not only is it a beautiful place to live, Portugal offers many advantages from a financial point of view.
To make the most of your move, early tax and financial planning will prove invaluable. Even if you have been living here a while, you should regularly review your arrangements to make sure they are up to date.
Here are the key wealth management issues you need to be aware of and plan for.
Once you become resident here, you are liable to Portuguese tax on worldwide income and certain capital gains, so you need to be prepared for this.
You are usually considered tax resident after 183 days in Portugal, but it can be earlier if you relocate with the intention of making it your home. Also, be mindful of the residency rules in your country of origin. Under UK rules, for example, 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 have flexibility, timing your change of residency could minimise tax liabilities and maximise opportunities in both countries.
Portuguese taxation and NHR
New residents can enjoy significant tax benefits for their first 10 years through Portugal’s ‘non-habitual residence’ (NHR) regime. To qualify, you cannot have been resident within the last five tax years and should apply through the local tax office soon after arrival.
Besides offering a fixed 20% income tax rate for ‘high value-added’ professions, NHR lets you receive some foreign income tax-free or at a reduced rate. You could also pay no Portuguese tax on gains from UK property.
Even outside of NHR, Portugal can be highly tax-efficient for expatriates. While income is taxable at progressive income tax rates up to 48%, there are often ways to lower taxes on your investment and pension income, so explore your new options.
Your savings and investments
A potentially costly mistake is assuming what was tax-efficient back home is the same in Portugal. UK ISAs, for example, are taxable for Portuguese residents.
Meanwhile, once you are resident here, you gain access to opportunities to enjoy favourable tax treatment on capital investments.
When relocating, taking a fresh look at your financial situation will ensure you are suitably diversified, and everything is set up in the best way for your new circumstances. Talk to a locally-based adviser who understands the Portuguese tax regime and can recommend tax-efficient solutions for your assets and wealth.
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. Look for structures that let you diversify by holding investments in multiple currencies, with flexibility to choose the currency of your withdrawals.
Buying and selling property
If you are still planning your move, another important issue to consider early is the tax implications of buying and selling property. When is the best time to sell your UK property and buy a Portuguese home to limit capital gains tax? Will you have to pay Portuguese ‘wealth tax’ on your new home? How can you make the most of available reliefs and allowances? Advance planning could save thousands in unnecessary taxes.
Take the time to understand your pension options and the tax implications before making decisions.
Those eligible for non-habitual residence can benefit from a flat 10% tax rate on pension income and withdrawals for 10 years, but make sure you understand the rules.
Many British expatriates benefit from transferring UK pension funds into a Qualifying Recognised Overseas Pension Scheme (QROPS), or by reinvesting a lump sum in more tax-efficient arrangements for Portugal. There’s no one-size-fits-all solution for a secure retirement, so regulated, personalised pensions advice is essential.
Under Portuguese succession law, unless you take action, ‘forced heirship’ rules could automatically pass a proportion of your worldwide estate to your immediate family, whatever your intentions. Spouses and ascendants/descendants are exempt from the Portuguese version of inheritance tax (‘stamp duty’), but other heirs could be liable for 10% when receiving Portuguese assets.
UK nationals often remain UK-domiciled – even after living abroad for years – putting your estate in the firing line for 40% UK inheritance tax. Good estate planning can ensure your legacy goes to your chosen heirs without attracting more tax than necessary.
With specialist cross-border advice, and early, careful planning, you can significantly reduce your tax bill and have the financial peace of mind to relax and fully enjoy your new life in Portugal.
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 is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com