Is there tax relief in Portugal if I am downsizing my home?

As I covered in a recent blog post, capital gains tax is charged on the sale of all property sold by a Portuguese tax resident, irrespective of where the property is located, or if it was your main residence or not. Capital gains tax is also payable by non-residents who sell property located in Portugal.

To briefly recap the rules:

• If you are a Portuguese tax resident and sell a property located in Portugal, capital gains tax is payable on 50% of the gain. This amount is added to your other income for that tax year and is taxed at the scale rates of income tax (14.5%-48%). If the property was held for more than 2 years, inflation relief is given
• If you are not resident in Portugal but you sell a personally owned property in Portugal, 100% of the gain is taxable at 28%. If the property was held in a non-Portuguese company the rate is 25%, or 35% if the company is based in a backlisted jurisdiction
• If the property sold was purchased before 1st January 1989, no capital gains tax applies

Despite the potential for high taxation, if the property sold was your main home there are two reliefs you can take advantage of to reduce or eliminate your tax bill:

• Reinvest the net sale proceeds into another main home in Portugal, or EU/EEA;
• Reinvest the net sale proceeds in an approved long-term savings plan or pension; or
• Use a combination of the above 2 options. This is useful if you wish to downsize

Any portion not used to purchase another main home or not reinvested in a savings plan/pension will be taxed.

In order to qualify for the reliefs there are certain hoops you will need to jump through. Let’s look at each in turn.

If you choose to reinvest the proceeds in a new main home:

The property sold must be your main home.

• You must purchase your new home within a certain time frame. This is a period of 5 years; 24 months before the sale of your previous home and 36 months after the sale
• You or your family must occupy and live in the new property within 36 months of the original sale
• The new home must be in the EU or EEA
• The new home must be real estate, this can include land for development. It cannot be a boat or caravan
• You must declare the necessary details on your annual tax return. It is best to work with your accountant to ensure this is done correctly as the reporting will be over several years unless you sell and repurchase property in one single tax year. If not done correctly, you will lose the relief

The above is all well and good if you want to buy a new property valued at the same price as the property you sold, but what if you do not?

The Portuguese government introduced a relatively new relief allowing you to reinvest the proceeds, or a part of the proceeds, in a long-term savings plan or pension rather than another property. Again, there are certain rules in order to qualify, but this can be a particularly advantageous option for those wishing to downsize.

The main conditions for qualification are:

• On the date of transfer of the property the taxpayer, spouse or unmarried partner is in retirement or is at least 65 years old
• The investment into the structure is made within six months from the date of sale
• The property sold is the main home
• Withdrawals from the structure are limited to a maximum of 7.5 % p.a. of the amount invested
• You must declare your intention to invest the funds in such a structure on your tax return in the relevant year

Whether a pension or a long-term savings plan is right for you will depend on your personal circumstances and the structure must qualify in order to obtain the tax relief, so it is important to take advice.