By Gavin Scott
As tax authorities everywhere look to increase tax revenue, rental income is coming under closer scrutiny. If you rent out property, whether in Portugal, the UK or elsewhere, you need to be sure that you are paying tax correctly. It is quite easy to make mistakes, especially if the property is located in one country and you are resident in another.
In the UK, HM Revenue & Customs (HMRC) calculates that it loses up to £500 million a year from underpaid tax on rental income.
It has launched a “Let Property Campaign” to encourage landlords to regularise their position, whether they have made genuine errors or deliberately not declared income. It is open to UK resident landlords and covers holiday lettings, including properties owned abroad in countries like Portugal.
A press release from HMRC warned: “HMRC will use information it holds about property rental in the UK and abroad, along with information already held on HMRC‘s digital intelligence system Connect, to identify people who have not paid what they owe. For those that fail to come forward, higher penalties – or even criminal prosecution – could follow.”
The campaign will run for 18 months, but HMRC said it will start to contact landlords it suspects of underpaying tax next year. Since those who voluntarily come forward receive the best penalty terms, it is best to look into this sooner rather than later if necessary.
With increasing exchange of information between countries, you can expect the UK authorities to find out about Portugal property and vice versa.
What are your tax obligations if you are a UK resident owning property in Portugal?
If you own property in Portugal but are a UK resident, you need to comply with both the UK and Portuguese regulations.
As a UK taxpayer, you need to declare the rent on your UK tax returns.Expenses can be deducted.
When you sell the property, any gains need to be declared and taxed in the UK. Overseas property must also be declared as part of your estate for UK inheritance tax purposes if you are UK domiciled.
Since the property is in Portugal it is also taxable in Portugal. Rental income earned by non-residents is taxed at a flat rate of tax. It used to be 16.5% but shot up to 28% this year.
You can claim day-to-day costs and stamp taxes, but these are limited in scope. Mortgage interest is not tax deductible in Portugal.
If you sell the property, tax is due on the capital gain. 100% of the gain is taxable for non-residents at a fixed rate of 28%.
It is possible for UK residents to opt to be taxed as a Portuguese resident.In this case, only 50% of the gain is taxable, at the scale rates of income tax. Inflation relief is given after two years of ownership. You have to declare your worldwide income in Portugal so the marginal rate of tax can be calculated.
If you still own the property when you die, it will be liable to stamp duty (inheritance tax). The rate is 10%, and spouses and children are exempt.
Portugal and the UK apply their own rules to calculate the tax due in each case, so the taxable amount will be different in each country.
You do not however have to pay tax twice. In the case of rental income, capital gains and inheritance tax, you can offset the Portuguese tax paid against the UK liability to avoid double taxation. If the UK tax is higher, further tax will be due in the UK. If the UK tax is lower, you do not get a refund for the difference.
Where necessary, the UK and Portuguese tax authorities will help each other collect tax.
For example, we are aware of a case where an individual sold his home in Portugal and returned to the UK without declaring the gain in Portugal, or paying the tax due.
The individual was tracked down by HMRC on behalf of their Portuguese counterparts and received a demand for payment totalling £23,020, including interest and costs.
This article looks at Portuguese rental income and gains for UK residents, but of course you will have similar tax considerations if you are resident in Portugal and own UK property.
It can be hard enough getting tax planning right in one country; getting it right when it involves two countries is even more complicated. You should seek professional advice from an adviser who specialises in both Portuguese and UK taxation and how the two interact.
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; an individual should take personalised advice.
Gavin Scott, Senior Partner of Blevins Franks. Gavin has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers.
Blevins Franks Financial Management Limited is authorised and regulated by the Financial Conduct Authority in the UK, reference number 179731. Where advice is provided overseas, via the Insurance Mediation Directive from Malta, the regulatory system differs in some respects from that of the UK. | www.blevinsfranks.com