By Portugal team
This article is published on: 31st January 2025
Good financial planning can protect your family´s future, save money and provide peace of mind. But where do you start?
When it comes to living in Portugal, understanding key tax rules, your financial options and the right questions to ask, can really make the difference.
You cannot choose where to pay your taxes—your tax residency determines this. If you are a tax resident in Portugal, you must declare and pay tax on your worldwide income and gains in Portugal, even if tax is also due in another country. For instance, if you receive rental income from a UK property, tax is due in the UK, but it must also be reported and potentially taxed in Portugal. You will get a tax credit from the UK so you will not pay tax twice, but tax may still be due in both countries.
Some believe that if they do not bring foreign income or assets into Portugal, they do not need to report or pay tax on them. This is incorrect, as Portugal does not operate a remittance-based tax system. All worldwide income and gains are taxable in Portugal, regardless of where they arise.
In Labour’s budget in October 2024, the government announced that the concept of UK domicile (which currently determines one´s liability to UK inheritance tax on their worldwide estate) will be replaced by a residency based system from 6th April 2025. Therefore, individuals who spend 10 or more years out of the last 20 (before death) will only face UK IHT on UK based assets. Restructuring your asset base outside of the UK can greatly reduce or eliminate any future UK IHT.
Portugal does not have a direct inheritance tax, but stamp duty at 10% applies to Portuguese assets inherited by non-immediate family members (e.g. siblings, nieces, and nephews). Holding assets outside of Portugal and proper estate planning can help minimise future tax burdens for your heirs.
If you are living in Portugal, you do not have to transfer your UK pension overseas. Whether an overseas transfer is right for you depends on multiple factors, including how you plan to use your pension. For example, if you intend to withdraw your pension in full, a transfer may be unnecessary and could incur fees without added benefits. However, if you do not intend to use your pension during your lifetime and meet the UK non-long-term residency rules, a transfer could remove your pension from the UK Inheritance Tax net.
Foreign pensions, including UK pensions, are generally taxable in Portugal. While NHR offers a temporary reduced tax rate (currently 0% or 10%), this benefit does not last indefinitely. Planning ahead and restructuring during your NHR period could significantly reduce future taxation.
Investing in a Qualifying Non-UK Pension Scheme (QNUPS) or an investment bond depends on your personal circumstances. However, a key difference is that QNUPS income is always taxable, meaning you may pay tax even if no gain is made or you have made a loss! With an investment bond, only the gain element is taxable, which may be a more tax-efficient option.
A common misconception is that if you do not take income from your investments, you will not be taxed. In Portugal, tax is due on an arising basis, meaning income, dividends, and capital gains are taxable when they are paid or realised (sale or switch of any fund/holding), unless held in a tax-efficient structure such as a pension, company, trust, or investment bond.
When selling a property in Portugal, 50% of the capital gain is taxed at scale rates. However, main residence relief is available if 100the full proceeds are reinvested into a new primary residence, a pension, or a long-term investment. The latter options allow flexibility to release capital while securing future income.
If you receive income or pensions in a currency other than euros, fluctuations in exchange rates can impact your finances. Using a currency exchange service or planning ahead with fixed-rate transfers can help stabilise your income and reduce the risk of unfavourable rate changes.
With over 35 years’ experience, Debrah Broadfield and Mark Quinn are Chartered Financial Planners and UK Tax Advisers specialising in cross-border advice for expatriates. For a complimentary initial consultation please contact +351 289 355 316 or portugal@spectrum-ifa.com. Alternatively, visit www.spectrum-ifa.com.
