Think beyond residency when planning for life in Portugal

The Brexit countdown encouraged many Britons to move to Portugal in 2020, perhaps earlier than originally planned and without having full time to prepare.

Although this would have guaranteed citizens’ rights under the UK-EU Withdrawal Agreement, there may be financial pitfalls from rushing such a move.

Getting your tax and financial planning right from the outset makes things easier and more cost-effective for you. But even if you’ve been living in Portugal for a while, there are usually steps you can take to improve your situation.

Portugal’s tax regime
When moving to Portugal, you need to prepare for a completely different tax system to back home. While there can be tax benefits in both countries, some opportunities may be lost if you wait until you have changed residency.

New arrivals in Portugal may qualify for the highly beneficial ‘non-habitual residence’ (NHR) regime, which offers tax exemptions on some foreign income for your first 10 years here. If you have not been Portuguese resident in the previous five calendar years, apply for NHR at your local tax office as soon as possible after you relocate.

Even if you do not qualify for NHR, you should explore the most tax-efficient investment, pensions and estate planning solutions for your particular circumstances and goals. Before you do anything with your UK assets, make sure you understand your options and how the right timing can lower tax liabilities in both countries.

UK pensions
While 25% of cash withdrawals can be taken tax-free in the UK, once you are Portuguese resident, they become taxable here (along with other non-government service UK pension income) at rates between 14.5% and 48%. If you qualify for NHR, however, you would only pay a fixed 10%.

Take some time to review your pension options, including whether you could benefit from moving UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS). Doing this is currently tax-free for EU residents, but now that Brexit is here, the UK could potentially widen its 25% ‘overseas transfer charge’ to capture EU transfers.

UK investments
Once you become non-UK resident, UK investment products such as ISAs and insurance bonds can lose their tax benefits, with interest or dividends taxable in Portugal. If you cash-in these investments as a Portuguese resident, capital gains tax can also apply. Explore alternative investment options available to residents here that offer better tax-efficiency as well as estate planning and currency benefits.

UK property
If you sell your main home when in the UK, it escapes Portuguese tax, but once resident here, UK capital gains are added to your other income and taxable at Portuguese income tax rates. Again, you could enjoy exemptions if you have NHR status. You could also avoid taxation by reinvesting the gain into another main home in Portugal (within 36 months of sale). Retirees can also avoid capital gains tax when reinvesting into an eligible insurance contract or pension fund – great news for downsizers.

Estate planning for Portugal
In Portuguese succession law, ‘forced heirship’ automatically distributes certain proportions of your estate to your spouse and children, even if your will specifies otherwise. While you can elect for the relevant UK/home country law to apply to your estate using the ‘Brussels IV’ EU regulation, this can be complex and have unwelcome tax implications, so consider your options carefully.

Applying Brussels IV will not affect liability for Portugal’s version of inheritance tax. Local ‘stamp duty’ charges 10% on Portuguese assets inherited by any heirs other than your spouse or direct family. If you remain UK-domiciled – as many expatriates do – your worldwide estate could also attract UK inheritance tax, so take specialist advice to plan accordingly. Ultimately, careful estate planning is crucial to ensure the right money passes to the right hands at the right time.

For the best results, take personalised, cross-border advice to make the most of suitable tax, pension, investment and estate planning opportunities, so you can relax and enjoy your new life in Portugal. And be sure to schedule regular reviews to check everything is still set up in the best way for your family’s circumstances as time goes on.

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 Adrian Hook
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Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).