What owning a slice of Portugal will cost you in tax

For many expatriates, owning a place in the sun is part of the dream retirement in Portugal. Be it a holiday home or somewhere more permanent, it is important to look beyond the price tag and understand all the tax implications.

Buying property

Imposto Municipal Sobre Transmissões Onerosas de Imóveis (IMT) is a transfer tax payable when buying Portuguese property. Ranging from 1% to 8%, rates depend on purchase price, its ultimate use and whether it is your main or second home.

An additional stamp duty (Imposto de Selo) of 0.8% is payable on purchase. Although new developments attract a higher rate in the form of 23% VAT, this is usually included in the property price.

Annual local taxes

The Portuguese version of UK council tax is Imposto Municipal Sobre Imóveis (IMI). Rates vary from 0.3% to 0.8% according to property type, location and age. While some exemptions are available, IMI can be doubled on vacant properties and increases to 10% where ownership is deemed to be based in a ‘blacklisted’ jurisdiction.

The new ‘wealth tax’

Introduced this year, the Adicional ao Imposto Municipal Sobre Imóveis (AIMI) affects those with a share in Portuguese property worth over €600,000. Regardless of residency, rates are 0.4% for properties held by companies, 0.7% for individuals and 1% for those owning property valued over €1 million.

Relief comes via a €600,000 allowance per person, deducted from the value of all Portuguese properties. So if, say, you and your partner jointly own one Portuguese home, the property will only attract AIMI if it is worth over €1.2 million, and then only on the value above this. Alternatively, someone owning three properties each worth €500,000 would be liable for tax on €900,000 – the properties’ combined value minus the individual allowance.

Those not eligible for the allowance pay AIMI on the full property value. However, for both IMI and AIMI, the tax authorities calculate property value using the Valor Patrimonial Tributário (VPT), which is usually lower than the actual market value.

Letting property

When renting out Portuguese property, the income is always taxable in Portugal, regardless of residency.

Net rental income for residents attracts a flat tax rate of 28%. Alternatively, you can choose to add rental income to your other income for the year and pay tax at the normal scale rates. However, with rates up to 48%, this option only benefits those within the lowest (14.5%) tax rate band.

For non-residents, tax on rental income is set at 28%, although maintenance, repair expenses and IMI may be deducted.

If you are UK resident, rental income (and capital gains) are also taxable in the UK. While you can offset the Portuguese tax paid against UK liability to avoid double taxation, expect to pay the difference if the UK tax is higher.

Selling property

You will be liable for capital gains tax when selling any Portuguese property bought after 1988.

If you are a resident, you pay tax on only 50% of the gain and receive inflation relief after two years of ownership. Gains are added to your other income for the year and taxed at the scale rates between 14.5% and 48%.

However, capital gains tax does not apply to residents selling a main home and using the proceeds to buy another home within Portugal or the EU/European Economic Area (EEA). While this currently means that Britons selling a Portuguese home to reinvest in a UK property are exempt, this is on track to change post-Brexit.

For non-residents, 28% is payable on the whole gain. Currently, as an EU citizen you can opt to be taxed as a Portuguese resident instead, but you will have to declare your worldwide income to calculate the applicable tax rate. Take care as this may not be the most tax-efficient approach.

Other tax considerations

If you die owning Portuguese property or gift it during your lifetime, recipients other than your spouse or children will face 10% stamp duty, wherever they live. Also, UK nationals may be considered UK-domiciled and therefore liable for UK inheritance tax, even if you are a Portuguese resident.

If renovating or extending Portuguese property, note that this could prompt revaluation by the tax authorities, potentially leading to higher ongoing IMI and AIMI charges. Bringing the VPT closer to market value, however, could provide capital gains tax benefits when selling the property.

Whether you are living in Portugal or just own property here, make sure you keep up with your tax obligations in both Portugal and Britain. It can be hard getting cross-border tax planning right, so take personalised professional advice to limit your exposure and get the most out of your home away from home.

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 are advised to seek personalised advice.

By Dan Henderson
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Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.