You may consider moving to the Algarve for a lifestyle change or to soak up some sunshine in your retirement years. But Portugal also offers much wider appeal, as new residents have the opportunity to enjoy a decade of generous tax breaks through the special non-habitual residence (NHR) tax regime.
What is non-habitual residency?
Introduced in 2009 by the Portuguese government to attract ‘high value’ industries and individuals, NHR is effectively a tax holiday for your first 10 years in the country.
If employed in Portugal, non-habitual residents can benefit from a flat 20% income tax rate – a significant reduction on the usual scale rates that reach up to 48%. You can qualify for this rate if you work in one of the pre-defined ‘high value-added’ scientific, artistic or technical professions.
Crucially, the NHR regime can be also be highly beneficial for retirees and other expatriates, as it offers the opportunity to receive foreign income completely tax-free.
Tax-free foreign income
Under NHR, most income from a foreign source is exempt from Portuguese taxation for 10 consecutive years, as is income that is taxable in another country.
This means that British expatriates can potentially receive most UK pensions, rental income, capital gains on real estate, interest, dividends and non-Portuguese employment income tax-free.
Importantly, this can apply even if the income is not actually taxed in the home country. UK dividends, for example, (but not gains on UK shares) escape Portuguese taxation under the NHR scheme because they are taxable in Britain under the UK/Portugal double tax treaty. In practice, however, ‘disregarded income’ rules can eliminate UK tax liability for non-residents. As a result, you could end up paying no tax – in either country – on the income.
Tax-free pension income
Although the UK/Portugal tax treaty gives Portugal exclusive taxing rights on UK pensions, most income – including from private pensions, company pensions and the State Pension – will not be taxed under NHR. The exceptions here are UK government pensions (including local authority, army, police, teaching, fire service and some NHS pensions) which always remain taxable in the UK.
So if you take your non-government UK pension as regular income, you can generally do so as a non-habitual resident without being taxed in either country. Beware, however, that under a new ruling you may be subject to Portuguese income tax if you withdraw your entire UK pension fund as lump sum payments over a period of less than 10 years.
How can you access NHR benefits?
People of any nationality (including non-EU/EEA citizens) can potentially qualify for NHR if they have not been resident in Portugal within the previous five calendar years.
You need to meet Portuguese residency rules to be eligible, however, so it will be much easier to apply now as an EU citizen with full freedom of movement. Currently, you can acquire Portuguese residency by spending at least 182 days a year here or having your main home here.
Although Brexit itself will not affect Britons’ eligibility, domestic tax rules are always subject to change. It is also possible that the UK government may negotiate special exemptions to increase taxation of Portuguese-resident nationals once it sheds its EU obligations.
So if you have recently arrived in Portugal – or are thinking about making a permanent move here – register for NHR with the Portuguese tax authorities as soon as possible to make sure you lock-in today’s benefits.
Other tax benefits in Portugal
Even if you do not qualify for NHR, Portugal can still be very tax-efficient for expatriates.
UK pension income outside the NHR regime attracts the usual scale Portuguese income tax rates from 14.5% to 48% and investments are liable to a flat 28% rate, but there are opportunities to enjoy extremely favourable tax treatment on investments. If you qualify for NHR, you may further benefit from combining these structures with the regime rules. For example, you could potentially sell a UK property without capital gains charges and reinvest in a tax-efficient life insurance bond.
There is a wealth tax of sorts, but rates are relatively low and it only affects those whose ownership of Portuguese property is worth more than €600,000 (€1.2 million for couples). Portuguese inheritance tax (stamp duty) is also limited; at just 10%, it only applies to Portuguese assets, and spouses and children are exempt.
Ultimately, the best course of action for you will depend on your individual circumstances and aims. Whatever your situation, it is sensible to take personalised advice from a cross-border specialist – sooner rather than later – to make sure you take full advantage of current opportunities in Portugal.
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 take personalised advice.
By Dan Henderson
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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.