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 some basic rules, your options and the right questions to ask, can really make the difference.
Financial planning tips for Portugal
By Portugal team
This article is published on: 10th January 2024
1. You cannot choose where to pay your taxes. Where you pay tax is based on your tax residency. If you are a tax resident in Portugal, you must declare and pay tax on your worldwide income and gains in Portugal. Tax may also be due in another jurisdiction, but this does not negate your responsibility to also report it in Portugal. For example, if you receive rental income from a UK property, tax is due in the UK but the income is also reportable and taxable in Portugal. You will get a tax credit so you will not pay tax twice, but tax still may be due in both countries.
2. Some individuals believe that if they do not bring assets/income into Portugal, they do not have to report or pay tax on it. This is not the case, as Portugal does not have a remittance basis of tax. All income and gains are taxable in Portugal, irrespective of where they arise.
3. Many UK nationals believe that once they have left the UK, they will no longer be subject to UK Inheritance Tax (IHT). Unfortunately, this is not the case. IHT is based on your domicile, not your residency and losing a UK domicile of origin is a tricky process that requires an individual to sufficiently break ties with the UK, no longer see it as “home” and have the intention to never return. Specialise advice must be sought.
4. “I have to transfer my UK pension overseas”. You do not have to transfer your UK pension overseas if you are resident in Portugal. Whether an overseas transfer is right for you will be dependent on several factors and your objectives. For example, if you intend to drawdown your pension fully, a transfer overseas is likely not required, as this will incur fees and may provide little or no additional benefit. Alternatively, if your pension benefits are close to the new “UK lifetime limit” an overseas transfer may save a lot of potential future taxation.
5. Pensions and taxation. Whilst pension are tax efficient during NHR, post NHR pension income is generally taxed at scale rates. Some individuals claim the 85/15 treatment in Portugal which is reserved for annuities, and whilst may not be picked up on by finances, this is a grey area of planning and if audited the onus is on the individual to prove the type of income payment and the source/contributions.
6. Investing in a QNUPS (Qualifying Non-UK Pension Schemes) or investment bond? The right structure will be dependent on your personal circumstances, but the main difference in taxation between the two is that QNUPS income is always taxable, so you can find yourself paying tax even if no gain has been made or you have made a loss! With a bond, only the gain element is taxable.
7. “Putting assets within a QNUPS will guarantee protection from UK IHT”. Whilst using QNUPS can protect your wealth from UK IHT, this is not guaranteed, and careful planning must be done. HMRC are clear that a QNUPS must be used for pension purposes and not for tax avoidance purposes, otherwise the QNUPS will fail. Putting large portions of your estate in a QNUPS and funding them to a level that is clearly in excess of pension provision needs may be an indication of tax avoidance for HMRC.
8. “As long as I don’t take income from my investments, I won’t pay tax”. Tax is due on an arising basis i.e. when income/dividends are paid or capital gains are realised on sale/switch unless held in a pension, company, trust or investment bond. Therefore, even if you have not physically taken the money out to your bank account, tax is still due.
9. If you are selling your home in Portugal capital gains tax is due on 50% of the gain at scale rates. There is main residence relief if you use 100% of the proceeds to buy a new home or invest the proceeds in a pension or long-term investment, the latter allowing you to release capital and provide a future income.
10. If you are selling a property with an active AL license, or one that was cancelled within 3 years of sale, 95% of the gain is taxable at scale rates. This is often overlooked and an unpleasant surprise on sale.