There are many benefits to owning a property in Portugal but peace of mind about your finances is essential so you can enjoy them. You should seek advice on your tax liabilities, both in Portugal and your home country if you are not resident here, as these can vary depending on where you are tax resident. You also need to take into account whether the property is your main home, a holiday home, or an investment.
If you own and rent out a Portugal property, the income is always taxable in Portugal, whether you are resident here or not.
▪ Portugal residents pay tax on rental income at a flat rate of 28%. You can add rental income to your other income for the year so it is taxed at the normal scale rates. However, this is unlikely to be beneficial if you pay tax at anything other than the lowest tax rate, currently 14.5%.
▪ Non-residents pay tax at 28%; the letting agent must deduct this from the gross rent.
▪ Maintenance expenses and municipal property tax (IMI) may be deducted from rental income if they are documented.
▪ UK residents also pay tax in the UK. Both the UK and Portugal use their own tax calculations, so the amount is likely to be different. You can offset the Portuguese tax actually paid against the UK liability to avoid double taxation, but if the UK tax is higher, further tax will be due in the UK.
Capital gains tax
You will have to pay capital gains tax when you sell your Portuguese property, unless you bought it before 1989. Portugal residents pay tax on only 50% of the gain and, if you have had the property for more than two years, you get inflation relief. Gains are added to your other annual income and taxed at the scale rates of up to 48%.
However, gains from selling your main home are exempt for residents if you reinvest all the proceeds (net of any mortgage on the property) in another main home in Portugal or the EU/EEA within 36 months after date of disposal or 24 months before. You will have to live in the new property within six months.
Non-residents pay tax on the whole gain at 28%. An EU resident can choose to be taxed as a Portugal resident but you have to declare your worldwide income in Portugal to calculate the marginal rate of tax that will apply.
UK residents also pay tax on the gain in the UK, but under the terms of the double tax treaty, any tax paid in Portugal can be credited against the tax due in the UK.
If you die owning the property, or gift it during your lifetime, recipients will have to pay Portuguese stamp duty at 10% regardless of your residency situation – unless they are your spouse or child, in which case they are exempt. Stamp duty is payable even if the recipient does not live in Portugal.
If you are a UK domicile, as most British expatriates are, your Portugal property, along with other Portuguese assets, will form part of your estate for UK inheritance tax purposes.
Local and transfer taxes
There are a number of other taxes you need to consider when you buy a property. First of all, you have to pay a transfer tax, known as IMT. What you pay depends on the ultimate use of the property and whether it is your main or second home.
Then you have to pay stamp duty at 0.8% unless the sale is subject to VAT at the standard rate of 23% – this is charged on all new buildings. Stamp tax of 1% is also payable on all residential buildings worth €1m or more.
Finally, there is IMI, the annual municipal property tax payable by whoever is the owner at December 31 that year. This is based on the registered value of the property and fixed by each municipality. The rates range from 0.3%-0.8%, depending on the type, location and age of the property, although there are some exemptions available. For properties owned by individuals or companies resident in blacklisted jurisdictions, IMI is 7.5%.
Whether you are living in Portugal or just own property here, UK nationals should always seek guidance from someone experienced in both Portuguese and UK tax and how they interact. Specialist, personalised advice will ensure unexpected taxes do not catch you out, and that taxation is mitigated wherever possible.
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 is advised to seek personalised advice.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, 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. | www.blevinsfranks.com