The Non-Habitual Residence (NHR) tax scheme has attracted many new residents to Portugal and has been a bonus for those relocating here for lifestyle reasons.
Viewing posts categorised under: Non-habitual residency in Portugal
Looking towards the end of Non-Habitual Residence in Portugal
By Portugal team
This article is published on: 22nd February 2023
22.02.23
Whilst the scheme offers a 10-year ‘window’ of tax-reduced or even tax-free living, the position following the 10-year point can bring a substantial increase in tax exposure. However, with careful planning, it is possible to put yourself in a similar or even better position post-expiry of your NHR status.
Your position post NHR
After the NHR term, you are simply treated as a standard Portuguese taxpayer, and we can look at the contrast between pre and post-NHR treatment through the examples of UK property, pensions and dividends.
UK property
During NHR, any rental income from UK property is tax-free in Portugal, however post-NHR it becomes taxable at 28%.
In addition, during NHR you can sell UK property free of Portuguese capital gains tax but post NHR, you will face scale rates of tax on 50% of the gain. This difference can be particularly stark when considering the sale of a former UK main residence, as the following case of a lady we helped shows.
She purchased her UK home for £725k and the current value was £1.5m. She was unsure whether to sell her UK property shortly after moving to Portugal or to wait. Because of the timing of the sale, selling shortly after her arrival in Portugal would result in no tax in the UK and no tax in Portugal.
If she waited until after the NHR period, UK capital gains tax would be due on the gain made from April 2015 to the date of sale at 18%/28%, and additionally, tax would be due in Portugal on 50% of the gain at scale rates (up to 48% plus solidarity tax 2%/5%). Note, credit is given in Portugal for tax paid in the UK.
Pensions
During NHR, pension income is taxed at 0% (for pre–April 2020 NHRs) or 10% (for post-April 2020 NHRs).
However, after NHR, this will jump to at least 28%, and possibly up to 48% depending on the type of pension and how it is reported by your accountant.
If you have the 0% pension tax rate, it is important to not deplete your pension too quickly, as taking large lump sum payments can risk an unexpected tax charge. The tax office may deem the income to be long-term savings income rather than pension. If you are in this position and wish to deplete your pension during NHR you should take advice if you have not done so already.
UK dividends
UK dividends enjoy a 0% tax rate under NHR but post NHR this increases to 28%.
There are solutions
The key is planning early so, whether you are nearing the end of your NHR period or just starting, you should seek guidance as early as possible.
As an example, to avoid the increase in tax on pension income, it is possible to deplete your pension scheme completely during the NHR period and reinvest in a more tax-efficient structure that will continue to provide income post-NHR but be much more tax-efficient (single-digit or at least very low relative tax rates).
For those drawing dividends from UK companies, some may be considering an exit from their business and the end of NHR can be a catalyst for reviewing options for a business sale (0% tax on the sale is achievable in certain situations).
Returning to the UK?
Some clients will have a 10-year plan to remain in Portugal whilst they have NHR status, and then relocate back to the UK when their NHR expires. For these clients, there are planning opportunities to re-enter the UK system very tax efficiently but advice must be sought on an individual basis.
Planning for Non-Habitual Residency in Portugal
By Mark Quinn
This article is published on: 16th December 2022
16.12.22
Portugal has long since been a popular expat destination, but the Non-Habitual Residence (NHR) scheme has been instrumental in attracting new residents seeking a favourable tax regime.
NHR is a preferential tax status granted to new residents and lasts 10 years. However, the benefits of NHR are not automatic and you must plan to make the scheme work for your specific situation.
Pre-arrival planning
The ideal situation is to start looking at your finances before you move. This way you can identify any tax planning opportunities available in your home country that would otherwise not be available in Portugal and utilise any tax breaks and annual allowances.
From a UK context, for example, ISAs are tax-free in the UK but if you wait to surrender until after establishing residency in Portugal you will incur 28% tax on any gain (even with NHR).
NHR period planning
During NHR it is important to maximise the tax opportunities available, particularly the flat 10% rate on pension income and nil rate tax on foreign-sourced capital gains and income. It is also the opportune time to start thinking about how to structure your finances for when NHR comes to an end.
Post-NHR planning
At this point, you become subject to the standard rates of Portugal tax and the effectiveness of your position will be determined by the planning you previous implemented, particularly during the NHR stage.
Whilst the prospect of paying up to 48% on income (excluding solidarity taxes) and 28% on all capital gains is unpleasant, it is possible to rearrange your finances over time to reduce this tax burden.
Lastly, there are some subtle rules to the NHR scheme and international tax meaning that in some cases applying for NHR can put you in a worse tax position. Likewise, those with pre-April 2020 NHR and enjoying 0% tax on pension income will be subject to slightly different restrictions when drawing down their pensions to maintain this status.
As such, we recommend you always seek advice from appropriately qualified individuals with effective cross-border experience.
With over 30 years of combined experience in the industry and over 15 in Portugal, we are best placed to provide expert, impartial and personalised advice to expatriates. Please contact us if you wish to discuss your position.
When Non-Habitual Residence does NOT work
By Mark Quinn
This article is published on: 20th May 2022
20.05.22
The nuances of advice part 1
Applying for the Non-Habitual Residence (NHR) scheme is generally considered a ‘no brainer’ but as these three cases studies in particular highlight, you must be careful as it can lead to an unexpected and worse outcome.
Case 1 – tax saved £280k
Paul contacted us as he was looking to apply for the NHR program once he moved to Portugal because he was aware of the 10% flat rate of tax applying to pensions.
After analysing the nature of Paul’s pension, and taking into account his other income sources, it transpired that he would actually be worse off by applying for NHR. This was because with the type of pension income he would receive, he would be able to report on the ‘85/15%’ basis in Portugal – this meant that, even if his income fell into the highest income tax bracket of 48%, the highest possible tax rate payable would have been 7.2%. Although 2.8% seems like a small amount to save, because he had a large pension in excess of £1m, this amounted to a significant saving.
In addition, Paul was also unaware that the 25% pension commencement lump sum (previously called tax free cash) that was available to him as a UK tax resident would be lost when he became a tax resident here. By highlighting this to Paul, and by mapping out a timeline for planning, we saved Paul additional tax.
Case 2 – tax saved $700k
George is originally from Australia but currently living in the UK and was looking to relocate to Portugal. His main driver was the ability to draw down his large final salary pension scheme at the flat 10% rate compared with the highest rate of 45% that he would pay as a UK tax resident.
After providing him with an actuarial comparison of the pros and cons of retaining the final salary scheme compared with extracting as a lump sum, George felt transferring the scheme suited his family position better.
On the surface, taking advantage of the 10% flat rate appeared to be sensible planning but we highlighted to George that his non-domicile status in the UK meant that, using the remittance basis of taxation, he could extract the fund in full at less than 3% tax in the UK.
We will continue the planning for George as he transitions from the UK and establish a suitable structure for him when he eventually establishes residency in Portugal.
Case 3 – taxed saved £400k+
Roger and Sue are the beneficiaries of a trust that was established by Sue’s late father many years ago, and this constitutes their main source of income.
As NHR does not benefit trust income, they would have faced a tax rate of 28% on all withdrawals from the trust.
After analysing options, we arranged for the trust to be wound up and distributed to Sue, saving the couple over £400,000 in potential income tax, and arranged a lower cost and lower risk structure that is tax efficient for residents of Portugal. In addition, they managed to maintain an appropriate level of control in terms of how their children benefited from the asset on their death without creating tax issues for them as beneficiaries in their country of residence.
The above cases highlight the importance of speaking with an experienced and regulated cross-border tax adviser. Contact on the form below.
Where am I resident and where should I be paying tax?
By Mark Quinn
This article is published on: 12th April 2022
12.04.22
There is a lot of confusion around the difference between residency, tax residency, Non-Habitual Residency and domicile so this week I will try and cut through this complexity.
Legal residence
Legal residence is the right to reside in a country. So, if you are an EU citizen, you have the automatic right to reside in any other EU country without the necessity for a visa. If you are coming from outside the EU, you must apply for a visa to establish your residency rights.
Legal residence is important as it determines how long you are allowed to spend in a country and your right to benefits such as healthcare and social security. Legal residence however does not impact or determine your tax status.
Tax residency
Generally, tax residency is determined by your physical presence in a country and Portugal, along with many other countries, uses the 183-day rule for determining tax residency.
Understanding your tax residency is important because it determines which country has the taxing right over you and can avoid double-taxation issues when you have links to more than one jurisdiction.
It is possible to have legal residence in Portugal, but not actually be a tax resident e.g. if you have the right to stay in Portugal but you do not spend enough time in Portugal in a given year to be considered tax resident.
Non-Habitual Residence (NHR)
NHR gives successful applicants a special tax status in Portugal for 10 years, but its name is somewhat misleading, as you must be a resident to apply for it.
‘Non-habitual’ actually refers to the requirement that you must not have been resident in Portugal in the 5 years prior to application, so it is aimed at attracting new people to Portugal.
Domicile
Domicile is something that is often confused with residence. It is a very complex area, but the very loose definition of domicile is ‘where you are considered to originate from’. It is a common-law concept and is most likely to be a consideration for British nationals, individuals married to British nationals, or those who are not British but either hold assets in the UK or spend a considerable amount of time in the UK.
Your domicile does not affect your income tax position in Portugal but it can have tax implications, most notably UK Inheritance Tax. (We will elaborate on domicile in next week’s article).
Myths
- Many people are under the misconception that, as long as they are paying tax somewhere, they are meeting their obligations but it does not work that way. It is crucial you have a clear understanding of where you are resident to avoid being taxed in more than one jurisdiction
- Registering yourself in Portugal does not automatically make you a tax resident. It is determined by your physical presence, so it is important to check your tax residency every tax year, as it could change
- Your nationality or citizenship does not change by coming to live in Portugal and becoming resident, although you do have the option of applying for Portuguese citizenship after 5 years
Planning
- Have a clear understanding of the tax residency rules of the country you are leaving. e.g. you can be tax resident in the UK by spending as little as 16 days there, or if leaving Spain a presumption of residence can remain if your family or your economic interests remain there
- Prior to departing your current country of residence, utilise any remaining annual allowances and pension contributions, consider reorganising your affairs via inter-spouse transfers, and unwind any structures free of tax that may otherwise be taxed on arrival in Portugal
- It may also be possible to create periods where you are not considered tax resident in any country or establish residency in another country prior to moving to Portugal for tax planning purposes
Mark Quinn is a Chartered Financial Planner with the Chartered Insurance Institute and Tax Adviser, qualifying with the Association of Tax Technicians.
Planning for Non-Habitual Residence | Portugal
By Mark Quinn
This article is published on: 4th April 2022
04.04.22
The Non-Habitual Residence (NHR) scheme has been a great success in attracting new residents to Portugal seeking a favourable tax regime and is also the ‘icing on the cake’ for those moving to Portugal for lifestyle reasons.
NHR is a preferential tax status granted by the Portuguese government to new residents and lasts 10 years. I will not write about the specific benefits as we have produced a dedicated NHR guide which is available on our website. Rather, I wanted the focus of this article to be on the planning that is required because the benefits of NHR are not automatic; you have to plan to make the scheme work for your specific situation and objectives.
When talking with clients, I break down the planning required into three phases: prior to arrival, during the NHR period, and following the expiry of the NHR status.
The planning required before arriving in Portugal involves:
- Utilising any tax breaks and exemptions in your home country. For example, in a UK context, you may wish to close any investments you have that work from a UK perspective but are not efficient in Portugal such as Individual Savings Accounts (ISAs). ISAs are tax free in the UK, but if you wait until you establish residency in Portugal to surrender, you are likely to incur unnecessary taxation
- If you are relocating from countries such as the UAE or Singapore, you may wish to consider realising capital gains prior to departure
- Considering taking advantage of your Pension Commencement Lump Sum entitlement (25% tax free cash) from pension schemes, as this is lost when you become a Portuguese resident
During the NHR period it is important to:
- Maximise pension income opportunities as NHRs benefit from a flat tax rate of 10% as opposed to rates of 20%, 40% and 45% in the UK. There is even the argument that any pension schemes should be fully depleted during the 10 year window, although this does have to be balanced against the inheritance tax efficiency of retaining money within a pension scheme
- Plan well in advance of the 10 year period and ideally look to establish structures that can be effective post NHR. If your position does not allow for immediate restructuring and is tax efficient under NHR but not post-NHR e.g. property portfolios, you should start reviewing your position again around years 7-8 of the NHR period to prepare for life after NHR
- Review your affairs regularly to take account of personal, family or legislative changes
- For those of you taking salaries or a combination of salary and dividends from companies in the UK, you may wish to re-weight the focus to a dividend only strategy
After the end of the NHR period, you become a standard Portuguese tax resident and will pay tax at the prevailing rates. The effectiveness of your position is determined by the planning you have implemented during the first two periods.
A few caveats for you to consider:
- There are subtle nuances to the NHR scheme and international tax rules meaning that in some cases it may be in your best interest not to apply for the NHR regime
- For those of you enjoying the 0% tax rate on pension income (which applied to NHRs prior to April 2020), the planning will differ
- If you are a non-UK domicile, there are further issues and tax-saving opportunities to consider, and again, delicate planning is required in this area to ensure success
As always please seek advice early and as the only UK Tax Adviser and Chartered Financial Planner in Portugal, I can analyse your situation from both a UK context and Portuguese perspective.
Moving to Portugal post Brexit | Visa options for UK nationals
By Mark Quinn
This article is published on: 28th March 2022
28.03.22
Whether you are ‘for’ or ‘against’, Brexit has had a wide-ranging impact on our daily lives.
A major consequence has been to the rights of British nationals to move freely around Europe to travel, live and work; especially so for those with holiday homes who now find themselves limited to 90 days in every 180.
To be clear, if you are an EU citizen, you have the right to freedom of movement and can therefore come and go as you please. So, what are the options for those Brits lucky enough to be able to commit to a permanent move to Portugal? You will have to apply for a visa.
Portugal has made it fairly easy to qualify for a visa by offering several options, obviously wanting to continue to attract foreigners to boost investment in the country. The most common are the Golden Visa (residency by investment) and the D7 visa (residency by passive income).
Both visas allow non-EU/EEA or Swiss citizens and their families to live, study and work in Portugal and ultimately apply for permanent residence or Portuguese citizenship. They also allow access to the Portuguese healthcare and education system, as well as free access to the Schengen area, and are a gateway into the advantageous Non-Habitual Residence (NHR) tax scheme.
The key difference between the two programs comes down to one of cost versus flexibility.
Validity
The Golden Visa (GV) is initially valid for 2 years. This can be renewed, and the renewal permits are valid for 3 years. After 5 years, you can apply for permanent residency or citizenship, or you can continue to renew the GV every 3 years. Your family can also obtain permits and the same benefits.
The D7 visa is valid for a stay of 4 months. After this, you apply for a D7 residence permit that will allow a stay of up to 2 years and this can be renewed for a further 3 years. After 5 years you can apply for permanent residence or citizenship. Your family can also obtain permits and the same benefits, assuming minimum criteria are met.
Minimum financial commitment
The GV has one of the lowest ‘residency by investment’ thresholds in Europe. There are many investment options, but the most commonly used is investment in real estate of at least €500,000. Changes at the start of 2022 restricted the location of the property purchase to low-density areas, excluding metropolitan and coastal areas such as Lisbon, Porto and much of the Algarve.
The D7 visa only requires the applicant to prove a minimum level of income equal to the Portuguese minimum wage. This can be in the form of dividends, rent, interest or pensions. If they are also supporting family, an additional 50% for a spouse and 30% for each child is required.
Minimum stay & tax dimension
The GV has a short minimum stay period in Portugal of only 7 days in the first year and 14 days in subsequent years. This is ideal for those who might not wish to trigger tax residency.
The D7 has a minimum stay of 6 months, therefore triggering tax residency.
If tax residency is triggered, you can apply for the NHR scheme which can result in substantial tax savings.
Cost of applications
Excluding 3rd party fees, the GV is approximately €5,900 for the main applicant and €5,400 per additional family member. Renewal is approximately €2,668 per person.
The D7 fees are much lower at approximately €255 per applicant and family member. Renewal is approximately €165 per applicant and family member.
Planning for Non-Habitual Residence in Portugal
By Mark Quinn
This article is published on: 21st March 2022
21.03.22
The Non-Habitual Residence (NHR) scheme has been a great success in attracting new residents to Portugal seeking a favourable tax regime and is also the ‘icing on the cake’ for those moving to Portugal for lifestyle reasons.
NHR is a preferential tax status granted by the Portuguese government to new residents and lasts 10 years. I will not write about the specific benefits as we have produced a dedicated NHR guide which is available on our website. Rather, I wanted the focus of this article to be on the planning that is required because the benefits of NHR are not automatic; you have to plan to make the scheme work for your specific situation and objectives.
When talking with clients, I break down the planning required into three phases: prior to arrival, during the NHR period, and following the expiry of the NHR status.
The planning required before arriving in Portugal involves:
- Utilising any tax breaks and exemptions in your home country. For example, in a UK context, you may wish to close any investments you have that work from a UK perspective but are not efficient in Portugal such as Individual Savings Accounts (ISAs). ISAs are tax free in the UK, but if you wait until you establish residency in Portugal to surrender, you are likely to incur unnecessary taxation
- If you are relocating from countries such as the UAE or Singapore, you may wish to consider realising capital gains prior to departure
- Considering taking advantage of your Pension Commencement Lump Sum entitlement (25% tax free cash) from pension schemes, as this is lost when you become a Portuguese resident
During the NHR period it is important to:
- Maximise pension income opportunities as NHRs benefit from a flat tax rate of 10% as opposed to rates of 20%, 40% and 45% in the UK. There is even the argument that any pension schemes should be fully depleted during the 10 year window, although this does have to be balanced against the inheritance tax efficiency of retaining money within a pension scheme
- Plan well in advance of the 10 year period and ideally look to establish structures that can be effective post NHR. If your position does not allow for immediate restructuring and is tax efficient under NHR but not post-NHR e.g. property portfolios, you should start reviewing your position again around years 7-8 of the NHR period to prepare for life after NHR
- Review your affairs regularly to take account of personal, family or legislative changes
- For those of you taking salaries or a combination of salary and dividends from companies in the UK, you may wish to re-weight the focus to a dividend only strategy
After the end of the NHR period, you become a standard Portuguese tax resident and will pay tax at the prevailing rates. The effectiveness of your position is determined by the planning you have implemented during the first two periods.
A few caveats for you to consider:
- There are subtle nuances to the NHR scheme and international tax rules meaning that in some cases it may be in your best interest not to apply for the NHR regime
- For those of you enjoying the 0% tax rate on pension income (which applied to NHRs prior to April 2020), the planning will differ
- If you are a non-UK domicile, there are further issues and tax-saving opportunities to consider, and again, delicate planning is required in this area to ensure success
As always please seek advice early and as the only UK Tax Advisers and Chartered Financial Planners in Portugal, we can analyse your situation from both a UK context and Portuguese perspective.
Tax efficient savings in Portugal
By Mark Quinn
This article is published on: 22nd December 2021
22.12.21
If you have arrived in Portugal from the UK there is a hope, or perhaps expectation, that there will be savings options similar to an ISA and other tax efficient investments.
Portugal does not have an ISA system but there is a similar investment, sometimes referred to as the “tax efficient, Portuguese compliant bond”. It is tax free whilst invested and has a very beneficial low taxation basis, especially if you require income from your investment.
The two big advantages with this structure are that there is no limit to the amount you can invest and it is portable to most other countries if you decided to move in the future.
There are many investment and currency options, so it is a simple and effective way of building a Portuguese compliant tax efficient savings structure to meet your personal objectives and needs.
Even if you have moved to Portugal to just take advantage of NHR (Non Habitual Residence status), and wish to return to your home country in the future, these structures can provide an incredible planning opportunity.
For example, if you return to the UK and the appropriate restructuring advice was to surrender the investment, the tax due on surrender would be proportional to the amount of time you have been in the UK. So, if you were non-UK resident for the whole period of ownership, then no tax is payable. If you were non-UK resident for 8 out of 10 years of ownership, the tax will only be calculated on the 2 year period of UK residence meaning you would benefit from an 80% tax saving!
For more information on the tax efficient, Portuguese compliant bonds, please contact us.
Non-Habitual Residency in Portugal
By Mark Quinn
This article is published on: 29th November 2021
29.11.21
What is Non-Habitual Residency (NHR)
and can I apply?
The Non-Habitual Residence (NHR) scheme is a 10 year beneficial scheme of taxation introduced to encourage individuals to come to live and work in Portugal.
Provided certain conditions are met, the primary scheme benefits are:
- a 10% flat rate on non-Portuguese sourced pension income. Some forms of UK pension income, generally government service pensions, will always be taxed in the UK
- tax free interest and investment income generated outside of Portugal
- tax free capital gains generated outside of Portugal
- 20% flat rate tax on earned income (self-employed or employed) for those with a qualifying profession. There is a prescribed list of qualifying professions
To meet the eligibility requirements, you:
- must not have been tax resident in Portugal in the last 5 years
- must have a permanent residence in Portugal. This residence can either be rented or owned
Applications for NHR must be submitted by the 31st March following your permanent arrival in Portugal.
If you are moving to Portugal, planning early is the key to favourably positioning yourself and obtaining NHR is highly advantageous as the tax savings can be very significant.
Having said this, whilst in the vast majority of cases NHR is beneficial, we have come across instances where NHR would have actually increased a clients’ tax liability.
Seeking advice is crucial and we welcome you to contact us.