Think beyond residency when planning your life in Portugal

Think beyond residency when planning your life in Portugal

Today’s ongoing Brexit and UK political uncertainty has encouraged many Britons to bring forward their plans to move to Portugal, while others are considering relocating for the first time.

Most focus on securing residence as quickly as possible. But without careful planning in advance, changing residency can have serious financial pitfalls. Even if you are already resident in Portugal, there are usually steps you can take to improve your tax situation. Getting it right from the outset makes things a lot easier – and cheaper.

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 most 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.

Tax on 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 potentially take UK pension income without paying tax in either country.

Tax on 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.

Tax on 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. Otherwise, you could reinvest the proceeds into another main home in Portugal within 36 months of the sale. Retirees can now also receive an exemption when reinvesting proceeds 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 too. Local ‘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.

Planning ahead
Although the possibility of returning to live in the UK might seem remote when embarking on a new life abroad, in reality, this happens quite often. The pull of grandchildren, bereavement or illness can all be reasons to return to the UK. Bear in mind that this may become more complicated – and expensive – after Brexit, once the UK is no longer bound by EU rules on freedom of capital. Again, early planning is the key to ensure your investments remain tax-efficient and your financial affairs are structured appropriately for your new home.

In any event, be sure to undertake regular reviews to check everything is still set up in the best way for your circumstances, address any new challenges and enable you to take advantage of any new opportunities.

Ultimately, taking personalised, cross-border advice is the key to making the most of suitable tax planning, pension and wealth management opportunities so you can relax into 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 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).