Think beyond residency when planning your life in Portugal

With less than five months to go before the end of the Brexit transition period, many UK nationals are rushing to secure residency in Portugal. Becoming lawfully settled before December 31, 2020, locks in citizens’ rights under the UK-EU Withdrawal Agreement – protecting access to healthcare, social security, education and employment opportunities for as long as you remain resident.

However, without careful, early planning, changing residency can have financial pitfalls. You need to understand how the local tax and succession rules work and make adjustments to suit your new home.
Although getting your tax and financial planning right from the outset makes things easier and cheaper, even if you already live in Portugal 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 regime to the UK. 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 individual circumstances and goals. And, 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 ranging from 14.5% to 48%. However, if you qualify for the NHR regime, you could benefit from a fixed rate of 10% on UK pensions.

Now is a good time to review your pension options, such as whether you could benefit from moving your pension to a Qualifying Recognised Overseas Pension Scheme (QROPS). While expatriates can currently transfer tax-free, beware the UK could start imposing a 25% ‘overseas transfer charge’ on EU/EEA transfers post-Brexit.

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. Alternative investment vehicles are 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 you are 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 proceeds into another main home in Portugal within 36 months of the sale. Retirees can also receive an exemption when reinvesting into an eligible insurance contract or pension fund within six months of sale.

Estate planning for Portugal
Portuguese succession law differs greatly from the UK’s. ‘Forced heirship’ rules automatically distribute certain proportions of your estate to your spouse and children, even if your will specifies otherwise. While you can elect for the relevant UK 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.

Note that 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.

Along with a review of your tax and financial affairs, estate planning should be a key part of your strategy when moving to Portugal to ensure the right money passes to the right hands at the right time.

Again, early planning is important to ensure everything is structured appropriately for your new home. 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.

For the best results, take personalised, cross-border advice to help you make the most of suitable tax planning, pension, investment and estate planning opportunities so you can relax and 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 Mark Quinn
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Mark Quinn is a Partner of Blevins Franks in Portugal. He holds a Bachelor’s Degree in Finance, a level 4 Diploma in Financial Planning (DipFA) from the Chartered Insurance Institute (CII) and is a Chartered Financial Planner.