You can downsize property and still leave a lasting legacy

You can downsize property and still leave a lasting legacy

With the Algarve offering fantastic properties in outstanding surroundings, it is unsurprising that many Britons choose to retire here to their own place in the sun.

Whether you buy a main home or just a somewhere to holiday, property is most likely your biggest asset, with the potential to provide a substantial return on your initial investment over time. For many, their home is also a legacy to help secure the financial future of children and other heirs.

However, there are risks in relying on bricks and mortar for your wealth. After all, you cannot fully realise the financial benefits of a property while you are still living in it. Compared to other investments, property can also prove very costly to maintain. Generally, the larger the property, the more expensive the running costs. If you are retired with a reduced or limited income, this can be draining on your resources, particularly if you own more than one property.

Affording retirement
With today’s increased life expectancy, you may need your existing wealth to stretch to 10, 20, or even 30 plus years in retirement. Are your pensions, savings and investments on track to sustain the lifestyle you want for as long as you need?

Many people find themselves in an ‘asset rich, cash poor’ situation, owning considerable physical wealth such as property but with substantially less disposable income. Expatriates in particular tend to hold on to UK property in addition to their overseas home.

While property can be a solid investment, it locks your money away in a highly illiquid way. If you want access to your capital, you may not be able to sell easily, nor for the right price. Also, there is risk in tying your funds up in one asset class – if the value of property drops, so does your investment.

Property offers potential leveraging opportunities – such as freeing up cash through equity release – but like any debt arrangement, this comes with costs and risks. For retirees looking to shed debt and leave something behind for children and grandchildren, more borrowing is not the answer.

Benefits of reinvesting your capital
Downsizing property can help increase your accessible wealth, but it needn’t be a compromise when it comes to investment growth. By reinvesting in suitable investment funds, for example, you can still invest in property but alongside other assets (equities, bonds etc.) to reduce risk through diversification. And, unlike property, if you require small amounts of cash, you can just sell the amount you need, not the whole investment.

A specialist adviser can help you explore investment arrangements that suit your particular circumstances, goals and risk appetite while being tax-efficient for Portugal. You could also unlock other benefits that property cannot offer, such as a regular income and currency flexibility.

Releasing capital from UK property
Expatriates living in Portugal can benefit from tax exemptions on the sale of UK property.

If you qualify for ‘non-habitual residence’ (NHR), you can sell UK property without attracting capital gains tax here for your first 10 years. For other Portuguese residents, only half the gain is liable at the income tax scale rates up to 48%. However, if you sell a UK (or other EU/EEA) main home and reinvest the gain into another main home in Portugal, you could be exempt.

Interestingly, if you are retired or aged 65+, you can now also avoid Portuguese capital gains tax by reinvesting some or all of the gain from a main home into an eligible insurance contract or pension fund within six months.

As Portugal offers such beneficial opportunities for residents with capital to invest, it is worth reviewing your options with expert guidance.

Reducing taxation
Wherever your home is, charges such as stamp duty and capital gains tax generally increase with the property’s price tag. Higher-value homes can also tip you over the threshold for wealth tax, as well as increasing the inheritance tax bill for your heirs.

Portuguese property, for example, attracts annual wealth taxes of between 0.4% and 1% if valued over €600,000 (€1.2 million if jointly owned), regardless of where you are resident. These rates may seem relatively low, but when applied to property values, this can add thousands to your tax bill. Reducing the amount of tax payable can make your money go further in your lifetime and maximise the value of your legacy.

Ultimately, while you want to make sure your family are looked after when you are gone, do not forget your own needs. Take personalised, cross-border advice to establish an investment and estate planning strategy that can secure a comfortable retirement for you in Portugal today and a lasting legacy for future heirs.

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.

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.