You are probably quite au fait with your home country’s investment structures, options, and practices, but what happens when you move abroad? Just because your investments are tax efficient in one country does not mean that the tax advantages will transfer to another.

Mark Quinn and Debrah Broadfield look at the taxation of typically held investments in Portugal and what options are open to residents looking to legally shelter from taxation.

Bank accounts

All bank interest is reportable and potentially taxable in Portugal, irrespective of where the account is located or if you use it or not.

If you have Non-Habitual Residence (NHR), interest earned on foreign accounts is tax-exempt, unless the account is held in a blacklisted jurisdiction such as Guernsey, Jersey, or the Isle of Man, in which case it is taxed at 35%.  So, if you are still holding large sums in these ‘tax havens’ you should consider restructuring this.

If you are a non-NHR, all bank interest earned on foreign accounts is taxed at 28%. Similarly, interest from Portuguese bank accounts is always taxed at 28%, irrespective of your NHR status.

Dividends

We usually see individuals with dividends paid from their own companies, directly held shares, or investment portfolios. This is a great source of income if you are a NHR as these are tax-free in Portugal during the 10-year period.

It is worth thinking about what you are doing with the income once received. If you are not spending it all and it is accumulating in a bank account earning little or no interest, you should consider investing this in a tax-efficient manner to get your money working for you.

For normal residents, dividends are taxed at 28% but there is the potential for tax savings if you can restructure.

Property

Foreign-sourced property income is reportable in Portugal but is tax-exempt during NHR. Post-NHR, this income is taxed at scale rates (up to 48% plus solidarity tax at 2.5%/5%) with a credit given for tax paid in the country where the property is located (if there is a double tax treaty).

NHR does provide a unique tax-saving opportunity when selling a foreign property. Usually, 50% of any gain on sale is taxed in Portugal at scale rates, but if sold during the NHR period there is no tax to pay. Do note however that tax may still be due in the country where the property is located.

Striving for tax efficiency

One of the most common and tax-efficient ways to save is within an ‘offshore investment bond’. Such structures are recognised throughout most of the EU and in the UK.

Unlike a standard investment portfolio, that attracts capital gains and income tax as it arises, gains within an investment bond grow free of both income and capital gains tax. This is also known as ‘gross roll up’ and works in a similar way to a pension or a UK ISA.

The other main advantages over directly held investments are:
– You can control the timing of taxation. With standard investment holdings, when income or dividends are produced, they are deemed paid (whether actually paid out to you or not) and are taxable on an annual basis. With a tax-sheltered structure, income and gains are only taxable when a withdrawal is made.

– Withdrawals are very tax efficient. Withdrawals are split into capital and growth and tax is only payable on the growth. Although the tax rate on the growth element starts at 28%, you enjoy a 20% tax reduction after 5 years and a 60% tax reduction after 8 years.

It is worth knowing that this preferential tax treatment is enjoyed by both NHRs and standard Portuguese tax residents. And because the structure becomes more tax efficient over time, these are great long-term planning tools for those with NHR who intend to remain in Portugal once they are subject to the standard rates of tax post-NHR, or for long-term residents without NHR.

– These structures offer a unique tax planning opportunity for those who might return to the UK in the future. Under UK rules, only investment growth generated whilst resident in the UK is taxable. So, for those who have spent many years abroad in Portugal, this can create the opportunity for very advantageous tax planning on a return to the UK.

Lastly, choosing the right jurisdiction and provider is essential to ensure compliance in Portugal. You will also want to avoid jurisdictions with withholding taxes and bonds located in tax havens, as these are punitively taxed at 35%.

Many expats will be surprised to discover that even when selling their main home in Portugal, Capital Gains Tax (CGT) applies.

They may also not realise that when selling secondary or rental properties, tax is likely to be due in both Portugal and the country where the property is located. So, what do you need to know?

CGT
Portuguese residents are subject to CGT on their worldwide property gains. On the sale of Portuguese property, the tax treatment is the same for Non-Habitual Residents (NHR) and non- NHRs; 50% of the gain is added to your other income in
that tax year and taxed at scale rates.

For overseas property, there is no tax due in Portugal for NHRs but there is tax due (in the same manner as above) for non-NHRs. CGT is also likely due in the country where the property is located.

Can you mitigate any tax?
Despite the potential for eye-watering tax levels, some reliefs are available if the property you are selling is your home. The two mentioned reliefs can be used in isolation or conjunction.

1. Main residence relief: You can mitigate all (or a portion of) the CGT by reinvesting the sale proceeds (not just the gain) into another property in the EU or EEA. Any amount not reinvested is taxed
2. Reinvestment into a qualifying savings structure: This is a relatively recent relief and is particularly advantageous for those wishing to downsize (and therefore will not fully reinvest the sale proceeds), or for those moving back to the UK or elsewhere outside of the EU/EEA. There are strict criteria for qualification and we can advise on this area

NHR tax opportunity
For those with overseas property portfolios, selling these during the 10-year NHR period is much more tax efficient as the gain is exempt from CGT in Portugal. But hat about the tax due in the country the property is located? Let’s look at UK property as an example.

The UK only applies CGT to gains accumulated since 6th April 2015 and you will also have your annual UK CGT allowance to deduct (additional reliefs may also apply depending on your situation). If you bought an investment property in joint names in 1992 for £100,000 and it was sold today at £1m, ordinarily tax would be due on the £900k gain. But selling this as a non-UK resident, and assuming linear growth, you only pay tax on the gain since April 2015 i.e. £210,000.

You can effectively ‘wash out’ a large part of the gain simply by selling as a Portuguese tax resident and generating cash to fund your lifestyle.

Residency, domicile, visas and non-habitual residency… it can be confusing. Mark Quinn and Debrah Broadfield of the spectrum IFA group explain NHRs generous tax breaks, tax planning opportunities, and how to reduce or even eliminate income and gains tax on savings and investments.

Legal residence
Legal residence relates to the right to reside in a particular country. 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 – a common visa route is the D7 or ‘passive income visa’.

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 taxing rights 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 Portuguese 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. ‘Non-habitual’ actually refers to the requirement that you must not have been resident in Portugal in the five years prior to application.

You must apply for residency before you can apply for NHR. On obtaining residency, you have until the following 31st March to apply for NHR. If you miss this deadline there is no second chance to apply.

Domicile
Domicile is something that is often confused with residency. Your domicile does not affect your income tax position, but it does affect your liability to UK Inheritance Tax. It is most likely to be a consideration for British nationals, individuals married to British nationals, or those who are not British but spend a considerable amount of time in the UK.

UK domicile is very adhesive and is difficult to shed; moving to Portugal does not automatically remove your liability to UK inheritance tax, no matter how long you have been out of the UK. Likewise, simply sheltering the bulk of your assets in a trust or QNUPS is unlikely to protect assets from UK IHT.

Tax liabilities in Portugal
Tax residents of Portugal must declare their worldwide income and gains in Portugal. For those with assets in several countries, you might also have tax and reporting obligations in the jurisdictions where you hold the assets e.g. UK rental income is always taxable in the UK but is also reportable and taxable in Portugal. Whether you will pay tax twice depends on the Double Taxation Treaty between the two countries, but there are usually rules in place to avoid this happening.

Potential pitfalls
Many people believe that, as long as they are paying tax somewhere they are meeting their obligations, but this is not correct. It is important that you have a clear understanding of where you are resident to avoid being taxed in more than one jurisdiction or being fined.

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 five years.

Our team of advisers in Portugal talk about the inheritance tax (IHT) implications of leaving the UK and point out that British nationals are likely to remain liable to UK IHT even many years after departure.

To understand why UK nationals have a liability to IHT we must understand the concept of domicile.

There are actually four types of domicile, but relevant to most readers will be ‘domicile of origin’. Generally, you acquire your domicile of origin from your father – if he is British, you have a UK domicile and it is this that gives you your liability to IHT.

It is important to understand that domicile is different from tax residency; residency is based on your physical location – you can be a Portuguese tax resident and live in Portugal, never return to the UK but still have a UK domicile by virtue of your origin. The main impact of domicile is that it determines your liability to UK IHT. Simply, if you are UK domiciled, then you are liable to UK IHT. Moreover, IHT is based on your worldwide assets so, whether it be an Australian property or a bank account in the Cayman Islands,
It is all caught within the UK IHT tax ‘net’.

If you are UK domiciled and your worldwide estate is subject to IHT on death, and you are resident in Portugal, you could also have a Portuguese tax liability. Portugal, however, only taxes assets that are located in Portugal, eg property, and that pass to non-direct line ascendants or descendants. The UK/Portugal double tax treaty does not cover IHT and there is no automatic relief applied, so it is worth noting that there is a risk that double taxation might apply.

Can you avoid UK IHT?

Most people find IHT the most distasteful tax of all because, after working hard and having paid income tax, capital gains tax, stamp duty, VAT, etc, throughout their lives, the final ‘nail in the coffin’ is that the UK exchequer will take 40% of your estate on death.

• The simplest way to mitigate UK IHT is to gift assets during your lifetime. You can gift an unlimited amount to beneficiaries and pay no tax if you survive seven years from the date of the gift – this is known as a ‘potentially exempt transfer’. Be careful, however, that you fully surrender the rights and enjoyment of the asset because if not, it will remain in your estate for UK IHT purposes eg gifting property to your children but still living in it for free or at a reduced market rent.
• You can also take advantage of other gifting exemptions, such as your annual allowance of £3,000 or ‘gifting out of normal expenditure’ – if you can demonstrate you have surplus income to your needs, you can regularly gift the excess each year and this will fall immediately outside of your estate.

Whilst gifting is simple, some may not be comfortable relinquishing control just yet, so you could consider investment options such as a Qualifying Non-UK Pension Scheme (QNUPS). However, be careful, as if HMRC believe this is done for tax avoidance purposes, or it cannot be proved that it wasn’t, they can still tax this, so it must be managed carefully’.

You can ‘shed’ your UK domicile of origin by acquiring a new ‘domicile of choice’. You do this by moving to a new country and demonstrating your intention to remain there permanently. However, whilst it is easy to move country and change your tax residency, proving your intention is more challenging. HMRC does not have a prescribed list of ‘dos and don’ts’ but everything you do, say and leave behind can be used as evidence of your intention. Consider the case of Richard Burton, who after decades of living in Switzerland was deemed to have not shed his UK domicile because he had the Welsh flag draped over his coffin and was buried with a book of Dylan Thomas’s poems. HMRC successfully argued that he never truly severed ties with his ‘homeland’, Wales.

HMRC will not provide a certificate or determination of domicile during your lifetime, therefore meticulous recordkeeping is essential. It is the executors of your estate who will be presenting your non-domicile case after your death, as this is when a challenge might arise.

One of the most confusing aspects for expats is establishing where they should be paying tax after they have left the UK. Many just assume that there is no UK liability after they have left.

UK property
Tax on income and gains from UK property is always taxed in the UK, even if you live in Portugal with or without NHR status. You do still have your UK annual personal allowance and capital gains tax allowance to offset against any taxable income or gains as a non-UK resident.

You must also declare this in Portugal and will receive a tax credit for the tax paid in the UK to offset any Portuguese tax liability.

UK government pension income
The taxing right remains with the UK in respect of former government service pension income, and you have your UK personal allowance to offset against this.

Government service pension schemes are not the same as the UK State Pension. The State Pension is not taxable in the UK, can be paid out to you gross and is taxable in Portugal.

UK private pension schemes
Private pension schemes are taxable in Portugal. Again, the income can be paid out to you gross by your pension provider. However, in practice, some people still find themselves having tax deducted at source on UK pension income and must reclaim it. If you complete a DT/individual form, available from HMRC’s website, and follow the submission process you will be able to receive your pension free from UK tax at source.

UK dividend & interest trap!
The UK has the right to tax UK-sourced dividends and interest under the treaty rules between the UK and Portugal but an interesting quirk of the rules is that when you submit your UK tax return HMRC will automatically calculate the best outcome for you; either to not tax your UK dividends and interest and in turn, you lose your UK personal allowance (this is called disregarded income treatment) or to tax them and preserve your personal allowance to offset against other income e.g. rental.

Special care must be taken if claiming split-year treatment – this is when you leave the UK partway through the tax year and you are only taxed in the UK from 6th April to the date you leave. A real-life example: an individual who left the UK in July subsequently took a large dividend in the same UK tax year. As a result, the dividend was taxed in the UK (even though they were no longer UK resident) and this resulted in a hefty tax bill. Had they waited until after the following 6th April, HMRC would not have taxed this.

Exceeding your UK day count
Another scenario where you could find yourself a UK tax resident, even though you have moved abroad, is when the relevant day count allowance is exceeded. The UK Statutory Residence test clearly sets out the rules and the allowable number of days to avoid getting yourself into this grey area. The day count can be as little as 16 days and as much as 182 days depending on the number of ties and connections you have.

UK Inheritance Tax
Another context when you can still have a UK liability is in respect of succession and inheritance tax. This is a complicated area, and we will dedicate next week’s article to exploring this topic.

Many British business owners may not have considered selling their UK business as a Portuguese tax resident, and whilst the UK rules for selling business are generous, we have seen several business owners enjoy better outcomes here in Portugal.

Opportunity
Non-Habitual Residence (NHR) status allows those in receipt of foreign-sourced dividends to receive them free of tax. This has proven to be a great opportunity for UK business owners who can enjoy the luxury of running their businesses at arm’s length.

But most owners do not want to run their businesses forever, and what many may not have realised is that selling their business whilst Portuguese tax resident could be highly tax efficient and, in some cases, provide a better result than the UK.

Real-life example
We recently worked with a business owner who had agreed to sell their UK-based business, but the sale would take some time to complete.

They knew what their tax liability on the sale would be in the UK but were keen to move to Portugal quickly, rather than wait for the sale to complete whilst they were resident in the UK. They were understandably disappointed to learn that the potential tax liability in Portugal would be markedly higher, at 28%.

However, on reviewing the structure of the business and how the sale was arranged, we were able to advise on a position where the couple could move to Portugal immediately with a resulting zero tax liability. Additionally, working with a local accountant, it was possible to create an accounting loss for them to use against future gains in Portugal.

In addition, we presented a highly diversified and managed risk solution to preserve and grow their wealth, whilst also future-proofing them for the end of their NHR status and a possible return to the UK.

The position turned out to be better for them selling as Portuguese tax residents, rather than UK tax residents, and they got to get on with their new life in the sun sooner than originally planned.

Replacing business income
The most important step following a sale or after drawing large dividends is finding an appropriate new home for the cash – you do not want it sitting in the bank being eroded by inflation, invested in inappropriate structures, or held tax-inefficiently going forward.

Whether you want to replace the income you once enjoyed, or preserve wealth for future generations, the key is structuring correctly for your goals. This must take into account several factors, such as where you and your ultimate beneficiaries are resident and the associated tax implications, flexibility in access and appropriate investment strategies, to name just a few.

Explore your options
We regularly work with business owners’ UK accountants, tax advisers and other trusted parties to explore restructuring and selling options. We are also on hand for clients to ensure that the advice is coherent, viable and implemented correctly from a cross-border perspective.

We also work with clients to put longer-term plans in place to ensure ongoing tax efficiency, compliance, and wealth preservation here in Portugal. If you would like to explore your options, please contact us for an initial discussion.

It’s been a rough time recently for financial markets with many falling in 2022. 

We’ve experienced a once in a hundred-year combination of events, with the global pandemic, recession fears, rising inflation and interest rates, the war in Ukraine and the farcical situation of five changes of British Prime Minister in just six years!  

With that backdrop, it is no wonder markets have struggled, but there are several interesting statistics to show that now may in fact be a good time to invest if you are holding excess cash.

1. Falling markets mean the growth outlook has improved
The first point is counterintuitive, but the 2022 market declines have actually improved growth expectations.

For example, Vanguard, the second largest fund manager in the world, has recently revised its growth forecasts upwards and believes that investors will now be better off over the next decade than if 2022 had not occurred.

Vanguard’s growth forecasts for global equities are now 7.4%-9.4% over the longer term.

The fall in bond prices in 2022 has similarly resulted in better growth expectations, as lower prices mean new investors are now enjoying higher levels of income yield.

2. 2022 was very rare in investment terms
Bonds and shares/equities tend to move in different cycles i.e. if shares are falling in value, investors seek the relative safety and income of bond investments and this causes bond prices to increase in value.

However, this relationship broke down in 2022, being one of only three years in the last 45 where shares and bonds were down at the same time – the chance of this happening going forward is low.

3. Two consecutive years of stock market falls is rare
Data from NYU shows that the chance of having two consecutive years of stock market declines (as measured by the US S&P 500 index) is low. The chance of 2023 being negative is just 9% based on this data.

4. Short periods to recover losses
Figures from Gugenheim have examined previous market falls of between 20 and 40% and found that the average time to recover the losses is just 14 months.

With global markets starting their declines in late 2021, based on this statistic we would be nearing the end of the downturn in markets.

5. Equities outperform cash over different time periods
Some investors perceive cash as more secure than shares. However, data from Blackrock shows that shares (S&P 500) outperform cash (Treasury bills) over many different time periods, even short time horizons.

The statistics I found particularly interesting are that, even on a short-term basis, shares would outperform cash holdings, for example 64% of the time over one month and 81% over one year.

6. Time is on your side
Data from Macrobond covering the 1971 to 2022 period shows that time is on your side with investments.

Over any one-year period, the chance of generating a positive return is 72.8%, but if you extend the period to 10 years the chance of a positive return increases to 94.2%.

These statistics of course are not a guarantee that markets will recover in 2023, but the convergence of all these factors is, for some investors, a positive indicator for the direction of equity returns for the year or two ahead.

More important though is that short-term market events should not be a distraction when implementing a long-term investment strategy.

We can guide you on how and where to structure your investments efficiently as a Portuguese tax resident, whether or not you are a Non-Habitual Resident, and how to futureproof these investments from changes in your personal circumstances.

Whether you are living in Portugal or thinking about a move, you will have heard lots of tips and tricks from friends and done your fair share of Googling. Here we list some of the most common planning mistakes so you can avoid them.

1. Planning too late
Most people tend to be reactive rather than proactive when it comes to sorting out their finances. Planning ahead of your move will allow you to take full advantage of all the windows of opportunity and the tax savings Portugal has offer. But if you have already moved and have not made plans yet, it is not too late to improve your long-term position. Don’t put it off.

2. Syncing for a different system
Some people do not review their assets and are of the view that their planning has worked just fine up to now. But Portugal’s system is markedly different from the UK and you could unknowingly be doing yourself out of benefits and tax breaks, or even worse, creating further (unnecessary) tax liabilities.

3. Not applying for Non-Habitual Residency (NHR)
Applying for NHR is generally a financial “no-brainer”. Just because you think you don’t need it now, does not mean it may come in handy in the future. You only have a small window of opportunity to apply for NHR once you become a resident of Portugal, so do not miss out. It could save you thousands in taxes in the long run.

4. Withdrawal strategies
Taking money from the wrong place, at the wrong time or at an inopportune time can be expensive and create tax liabilities that could otherwise be avoided. If possible, you should plan at least 12 months in advance and take advice if you are not sure of the best way forward.

5. Not paying attention to fees and charges
Charges can profoundly affect returns but can be disguised by good market performance and/or ‘clever’ advisers. Read the small print, ask questions and shop around to find out if you are really getting a good deal.

6. Focusing on return and not risk
Many investors focus solely on headline performance and do not consider investment returns in the context of risk. This is important, particularly if you are a balanced or cautious investor. If two portfolios generate an average of 5% a year but one is very high risk and the other is very low risk, clearly one portfolio is better than the other.

7. Not knowing your ‘number’
Do some cash flow planning. Many are unaware of how much they can safely spend based on their current wealth, pension provision and the need to plan for unforeseen expenses. They either spend too much and jeopardise their future lifestyle or worry unnecessarily and underspend, possibly missing out on a lot of fun!

8. Not reviewing enough or reviewing too much
We suggest you review your finances at least every 12 months. Times change and as new solutions become available, costs usually go down. But equally micro-managing and frequent changes are also counterproductive as it usually involves cost and stress. Get the right balance.

9. Not shopping around
If you meet a professional you like, that is great. However, shop around. Meet others and stress test the advice and proposition. Just because someone seems nice, does not mean they are the best person for the job.

10. Not planning for UK Inheritance Tax
Many believe that once they are out of the UK inheritance tax will not apply. This is wrong as it will always apply if you are UK domiciled. Moreover, you could also have a Portuguese tax liability meaning there could be double taxation. Ensure that you address estate planning as early as possible.