There’s no doubt that Portugal is a fantastic place to make your home, but did you know it can also offer financial advantages?
If you are planning to move to Portugal, with early, careful financial planning you can make the most of tax-efficient opportunities and avoid potential mistakes.
Tax residence in Portugal
You are usually considered Portuguese tax resident after 183 days in the country, but it can be earlier if you have a permanent Portuguese home – potentially even the day you arrive.
Once resident in Portugal, your worldwide income and certain gains become liable for Portuguese taxation, so understand how Portugal taxation will affect you and take steps to be prepared for it.
A decade of tax breaks awaits
The good news is that Portugal offers generous tax benefits to new residents for their first 10 years here through its ‘non-habitual residence’ (NHR) scheme.
Under NHR, those employed in Portugal in a ‘high value-added’ profession pay a flat 20% income tax rate, rather than the usual rates up to 48%. This regime can benefit retirees too, as foreign pension income is taxed at just 10%. Not only that, non-habitual residents can also receive most foreign income tax-free in Portugal.
You could qualify for NHR if you have not been Portuguese resident within the last five years, so aim to apply once you move.
Minimising your tax bill
Don’t assume what was tax efficient in the UK is tax efficient elsewhere. UK ISAs, for example, are taxable in Portugal, but Portugal can provide its own tax planning opportunities.
Even outside of NHR, Portugal can be a tax-efficient home, including the potential to enjoy extremely favourable tax treatment on investments. Many expatriates benefit from holding capital in a structure similar to an offshore life assurance policy or bond that acts as an investment wrapper to a conventional portfolio. No tax is payable on the underlying investment income until a withdrawal is made. Even then, only a proportion of the profit is taxable in Portugal and the effective rate of tax drops over time.
Limited inheritance tax
Portugal has a very benign inheritance tax regime.
The Portuguese version, called ‘stamp duty’, is only charged on assets located in Portugal and the tax rate is just 10%. Furthermore, spouses and ascendants/descendants are exempt.
Remember, however, that if you remain UK domiciled, your estate also remains subject to 40% UK inheritance tax (subject to certain exemptions).
Good estate planning can help ensure your legacy goes to your chosen heirs without attracting more tax than necessary.
Timing your move
It’s worth exploring which is the best time to sell your UK assets (property and investments). Would you pay less capital gains tax if you sold them as a UK or a Portugal resident?
Talking to a cross-border financial adviser will prove invaluable here as they will be up to date on both country’s tax regimes and the interaction between them.
Portugal’s wealth tax on property
If you’re thinking of buying a luxury property, bear in mind that Portugal currently imposes a ‘wealth tax’ of sorts (Adicional ao Imposto Municipal Sobre Imóveis, or AIMI) on high-value local property, regardless of where the owner is resident.
However, you are only liable if your stake in Portuguese properties is over €600,000, and then only on the value above that. If, for example, you and your partner jointly own a Portuguese home, the property will only attract AIMI if it is valued over €1.2 million. Rates are 0.7% for individuals, 0.4% for companies, and 1% for properties over €1 million. Some companies are not eligible for the allowance.
A financially secure retirement
If you plan to retire in Portugal, take some time to weigh up your pension options and establish which is best for you. There is no one-size-fits-all solution, you need to consider your circumstances, objectives and other accessible wealth, as well as the tax implications in Portugal. Take care to protect your retirement savings.
It is also advisable to review your savings and investments, including the currency you hold them in. Your circumstances and goals change when you relocate, so take a fresh look at your financial planning to make sure everything is set up in the best way for your new life.
Ensure your investment portfolio is structured around your situation, time horizon, needs, aims and risk profile, and that it has adequate asset allocation and diversification to reduce risk. At the same time, it needs to be structured to provide enough growth to beat inflation.
Unsurprisingly, cross-border tax and financial planning is complicated, so take personalised, professional guidance for the best results and to ensure you get the most of out of living 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.
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