If you are looking for your dream home in the Algarve, enjoy the search. There are so many wonderful properties here in fantastic locations, you’ll be spoiled for choice. When weighing up the cost of a property, however, look beyond the asking price to consider the various residence and tax implications.
If you are only planning to use your Portuguese property as a holiday home, take care to understand the residence rules.
While you are usually considered tax resident after spending 183 days in Portugal within a year, it can be earlier if you have a permanent home there – potentially even the day you arrive.
Triggering residency makes you liable for Portuguese taxes on worldwide income and some capital gains. However, with Portugal’s non-habitual residence (NHR) regime offering a decade of tax benefits to new residents, it is worth exploring whether a permanent move can actually prove more cost-effective for your family.
Purchase and local taxes
On buying a Portuguese property, you are charged a transfer tax Imposto Municipal sobre Transmissões Onerosas de Imóveis (IMT) of up to 8% plus 0.8% stamp duty (Imposto de Selo).
You are then subject to the Portuguese equivalent of UK council tax – Imposto Municipal sobre Imóveis (IMI) – of between 0.3% to 0.8% annually depending on the type, location and age of the property (10% where ownership is deemed to be based in a ‘tax haven’ jurisdiction).
Portugal’s ‘wealth tax’
If your stake in Portuguese property is worth over €600,000, you would attract Adicional Imposto Municipal Sobre Imóveis (AIMI) of between 0.4% and 1.5% each year, depending on value and how the property is held.
However, a €600,000 relief per person means couples with joint ownership only face AIMI on properties exceeding €1.2 million, and then only on the value above this.
Capital gains tax
When you come to sell a Portuguese home, you could be liable for capital gains tax in Portugal and potentially also the UK, depending on where you are resident.
For Portuguese residents, your worldwide gains are added to other annual income and taxed at the scale rates between 14.5% and 48%. Only 50% of gain is taxable, however, and inflation relief applies after two years’ ownership.
You will be exempt if you use the proceeds from selling a main home to buy another home within Portugal or the EU/European Economic Area (EEA). This therefore now affects British expatriates selling a Portuguese home to buy one in the UK.
Another exemption applies if you are retired or aged over 65 and reinvest gains into an eligible insurance contract or pension fund within six months of sale.
For non-Portuguese residents, 28% is payable on Portuguese capital gains; alternatively, EU/EEA residents can choose to pay the scale income tax rates instead if that proves more beneficial. Again, this has an impact for UK nationals post-Brexit.
Some gains from Portuguese assets are also taxable in the UK for UK residents. While a credit is available where tax is paid twice, you will pay whichever amount is larger.
Owning property through a company
The tax advantages of holding Portuguese property through an offshore corporate structure, such as a company or trust, have been diluted by new legislation in recent years. Since 2018, where a non-resident company’s value consists of 50% or more in Portuguese real estate, the gain on the transfer of shares may be subject to 25% Portuguese corporation tax (35% if from a ‘tax haven’).
Furthermore, companies trading in properties do not qualify for the wealth tax allowance, which means many ‘enveloped’ properties are liable for 0.4% on the property’s entire value each year.
So if you are considering buying a Portuguese property in this way, carefully weigh the pros and cons to determine if this is the most suitable approach for you.
Finally, you should think about what tax your beneficiaries will have to pay if they inherit the property on your death or you gift it during your lifetime.
Passing on Portuguese property to any recipients other than your spouse, children or parents will incur a flat 10% Portuguese stamp duty, wherever they live.
Remember: if you remain UK-domiciled – as many expatriates do – your Portuguese property and worldwide estate would also be within firing range for 40% UK inheritance tax.
With careful planning, it is possible to significantly reduce your tax liability, not just on your Portuguese home, but on your worldwide assets, investments and pensions, for you and your heirs.
Cross-border tax planning is complex and difficult to get right, so take personalised, professional advice to secure the financial peace of mind to fully enjoy your new home away from home.
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