Viewing posts categorised under: Portugal

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

Download my guides on moving to Portugal here

Planning for Non-Habitual Residence in Portugal

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.

Download my guides on moving to Portugal here

Difficult questions your financial adviser may not want to answer

By Mark Quinn
This article is published on: 30th March 2022

30.03.22

I like being asked tough questions –

It shows that clients have a real grasp of the key issues involved, which is great. It forces me to regularly reconsider the advice I give, and to make sure it continues to be the very best and most cost-effective solution. Also, and speaking from bitter personal experience of poor, disjointed advice I received in an area on which I am not au fait (renovating my property), I truly believe that clients are in a much more powerful position if they are aware of all the salient facts and issues.

With that in mind, and to put you in the most powerful position in your existing adviser relationship, I would start by getting the answers to the following:

Are you truly impartial or are you restricted to only recommending certain structures and funds? I come across many clients with the same structure managed by the same investment manager. How can one structure and fund be the most appropriate for all clients with a wide variety of issues and situations?
What qualifications do you have to advise? When you visit a professional one assumes they are qualified and good at what they do. It is remarkable therefore that many ‘advisers’ operate in Portugal without qualifications, and some even purport themselves to be tax advisers who do not have any formal tax qualifications. Those coming from the UK may be aware that ‘Chartered Financial Planner’ is the gold standard for advising clients, and ‘level 4’ is the minimum level of qualification required to advise.
How much am I being charged? One of the most damaging issues to the performance of your portfolio are the charges that are being taken from your policy. Many times, these are ‘bundled’ or paid discreetly out of the back end of the product. Ask for an explicit breakdown in writing between each fund’s ‘Ongoing Fund Charge’, product/structure charges and the fees or commissions your adviser is taking, and from where.

Find out more about Mark Quinn here

Have you disclosed the full charges to me? If not, why not? This is a contentious issue for some firms at present as, due to an EU directive, they now have to inform clients if they have not disclosed the true costs of the investments that they have set up and managed for them; obviously leading to many disgruntled people and tainted trust in the advisory relationship.
What is my number? Does your adviser tell you how long your money will currently last and under what conditions? Do they paint of picture of different scenarios and how these would impact this projection? Or how you can tweak your planning to achieve your goals?
How much risk am I taking? People often focus and compare the returns they might achieve but neglect to consider the level of risk their adviser is taking with their money. For example, two portfolios can achieve 5% a year return, but fund 1 may be down 50% at any point during the year, and fund 2 just 10% – clearly these two are very different investments, with fund 2 being superior.
Is my fund outperforming a tracker fund? One chooses to invest in a fund if the manager has a proven ability to deliver attractive returns relative to the market, and for this you pay the fund manager a fee, typically around 1% per annum. But are they doing their job and is it worth the cost? A 0.5% reduction in fees may sound trivial, but I recently showed a client they could save in excess of £200,000 in fees over time.

If you would like an independent analysis of your position,
it would be our pleasure to help you.

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.

Donwload our guides on moving to Portugal here

Planning for Non-Habitual Residence in Portugal

By Mark Quinn
This article is published on: 21st March 2022

21.03.22

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

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.

Download our guides here

Investing as a resident of Portugal

By Mark Quinn
This article is published on: 23rd February 2022

23.02.22

If you are relocating to Portugal (or if you are already resident here) it is important to carry out a review of your investments to make sure they will be tax-efficient in your new county of residence.

Just because your investments are tax-efficient in one country does not mean that the tax advantages will transfer to another county. There are various ways of investing as a Portuguese tax resident, including directly held stocks and shares, collective investments, trust and pension structures. One structure that is beneficial to use in Portugal, and which is used widely across Europe as a whole, is the investment bond.

The benefits of investment bonds

There are several benefits to using investment bonds:

Tax deferral during accumulation phase – gains within an investment bond grow free of tax, known as ‘gross roll up’. This means you can benefit from compounding and tax is only payable when withdrawals are made i.e. the gains are realised
Low effective tax rates when withdrawing funds from the policy – Only the growth element of any withdrawal is taxable, and further tax savings are available after 5 and 8 years. It is important to note that this preferential tax treatment is enjoyed if you are a Non-Habitual Resident or a standard Portuguese taxpayer
Control of the timing of tax events – the bondholder can control the timing of any withdrawal which creates the taxable event. This can be done to coincide with low-income periods, for example
Investment flexibility and diversification – as income and gains roll up free of tax within the structure, you are free to pursue any investment strategy without being constrained by the potential tax consequences of re-balancing or switching between strategies. Additionally, these structures can accommodate a wide range of currencies, asset classes and fund management styles, such as discretionary fund management, index trackers and self-management
Simplification of tax reporting – You are only required to report and declare any income and gains when withdrawals are made. This makes local tax reporting very simple
Portability – the investment bond structure is widely recognised in other jurisdictions so you do not necessarily have to surrender your investment if you relocate from Portugal
Succession planning – investment bonds allow flexible and certain transfer of wealth to beneficiaries. This may not be possible with other investment types and the default “forced heirship” provisions under Portuguese law
Inheritance tax savings – with the correct planning, holding wealth in an insurance bond could mitigate or even completely avoid UK inheritance for British domiciles
Estate administration – in the event of death, the proceeds of the structure can be distributed seamlessly to your beneficiaries without the need for any formal probate process

Interested in learning more? Contact me now for a free financial review

At Spectrum, we can help analyse your options and if appropriate for you, advise on how to set up the optimum bond structure for you and your family, including:

How to set up the structure for maximum control and flexibility
Selection of a suitable provider and jurisdiction to hold your investment in, being cognizant of the relevant double tax treaty with Portugal
Which currency to hold the investment in and advise on the underlying fund choice
Consideration of trust options
Regular reviews of the structure and investment strategy on an ongoing basis in light of ongoing changes in taxation and investment markets

You can contact me using the form below to find out more on the services we offer and to arrange a free financial consultation.

*Mark Quinn is a Chartered Financial Planner with the Chartered Insurance Institute and Tax Adviser qualifying with the Association of Tax Technicians.

How do I make my cash work harder?

By Mark Quinn
This article is published on: 16th February 2022

16.02.22

This is a question I am asked almost daily, especially by those with cash on deposit in banks earning historically low levels of interest.

The problem
With inflation at elevated levels, the poor returns on offer by the banks are not just disappointing – they can be very damaging to the purchasing power of your money.

To illustrate just how damaging the effects of inflation can be, imagine we have a pot of £2m. If inflation is 2%, the pot would be worth £1,135,000 in 20 years’ time. With inflation at 5% over the same period, the pot is worth £717,000.

These levels of inflation might seem a distant concern, but the Bank of England expects inflation to reach 7% by spring 2022, and inflation remains at high levels across many developed countries.

What is the purpose of holding cash?
The main purpose of holding cash is for daily spending and as an emergency reserve that you can dip into at little or no notice. As such, there is not much else you can do but just accept the frustratingly low returns.

A financial planning rule of thumb is to hold at least 6 months of expenses in cash and this is in addition to any planned purchases. However, with the current uncertainty around Covid, there is an argument of increasing this to 12 months. Of course, this has to be determined on an individual basis but it is a good place to start planning.

For the cash that you do retain on deposit in the bank, give thought to:

where it is held – avoid blacklisted jurisdictions where any interest might be taxed at a punitive rate
level of protection – for example, the compensation scheme in Jersey, Guernsey and the Isle of Man is £55,000 compared with £85,000 in the UK and €100,000 in the EU. This is per person and per institution, so ensure you are spreading your cash amongst unconnected banks
currency – if possible, try and match the currency of deposit with your expenditure to minimise currency conversion risk

How to protect against inflation
With any cash in excess of your set spending period and emergency fund, you should consider purchasing or holding assets that have demonstrated the ability to act as a hedge against inflation. These tend to be equities and commodities, specifically gold.

Equities are traditionally seen as an inflation hedge because they represent ownership of physical capital whose value is assumed to be independent of inflation i.e. a company can offset rising input costs by simply charging more for their product or service.

Commodities are basic goods or raw materials that are treated equally, irrespective of who produced them, for example, sugar, copper, coal, gold. Commodity prices usually rise when inflation does, so they are seen as good protection against inflation.

Gold, a commodity itself, has been a shelter during times of crisis for centuries as it is physical and has generally held its value. As such, it is often considered a hedge against inflation and can even be seen as an ‘alternative currency’, particularly in countries where the native currency is losing value.

Having said the above, investing raises a related issue which is that assets that protect against inflation typically come with more volatility. This means that you must ensure you carefully consider and monitor risk, are properly diversified and are investing in an appropriate manner for your circumstances. If you are not an experienced investor, it is best to seek qualified advice.

How we structure investment portfolios?
We can help clients create well-diversified investment portfolios to meet their financial goals that are appropriate for their circumstances.

Simply put, we can assist with advising on:

Where to invest – choosing the right jurisdiction to hold your wealth for tax efficiency and security
How to structure your investment – selecting the right investment vehicle for your needs
Who to invest with – choosing the right financial institution(s) to entrust with your money
What you should be investing in – building an investment portfolio to meet your needs and preferences e.g. income, growth, ethical considerations, currency choices, risk mitigation, proper diversification

If you would like to talk about any of the points mentioned above, please complete the form below or call us +351 289 355 316

What is a good investment return?

By Mark Quinn
This article is published on: 11th February 2022

11.02.22

This was a question posed to me by a client recently. I was taken aback by the question as most clients (rightly or wrongly) tend to have fixed expectations about what a ‘good’ and ‘bad’ return is. It was an excellent question and I answered by saying that ‘good’ isn’t absolute; it is relative to the economic and financial environment in which we live.

For example, I remember walking into Cheltenham & Gloucester, Manchester in 1997 and opening a savings account and earning 7.5% per annum! Back then, the Bank of England base rate was 7.25%. If at the same time you were achieving a 7.5% pa return by investing in say, shares or gold, this would not be a ‘good’ rate of return because you would be taking much more risk to achieve the same return as that offered by the bank and only a few basis points above the base rate.

So, with the Bank of England interest rate currently sitting at 0.50% and the ECB base rate at a negative figure of -0.50%, a 4% or 5% pa return looks very attractive today, even though it would not have done in 1997.

Another factor we need to consider when assessing what a ‘good’ return means is the level of risk we take to achieve the return.

In constructing our portfolios at Spectrum, we always consider performance in the context of risk taken to achieve that return. For example, two funds can both achieve a 5% pa return but one fund may have fallen in value by 20% whereas another fund may be down just 5%. Clearly, the latter is a better fund.

We can analyse this in more detail by considering “scatter diagrams” which is an interesting way of looking beyond headline performance figures.

CLICK ON THE IMAGE ABOVE FOR A LARGER VIEW

This type of chart shows performance on the vertical axis and compares this with volatility on the horizontal axis, which is a measure of risk.

Ideally, we want a fund that is in the top left of the chart i.e. it has very low risk and a very high return. Unfortunately, we know that we cannot have our cake and eat it and in the real world we have to take risk to achieve return, but the important thing that these types of charts highlight is if you are taking risk and not being rewarded for it.

For example in the above chart, fund B (purple square on the far right) is taking a high level of risk relative to the other funds as it is the furthest right on the horizontal axis and it is achieving a high level of performance as it sits high up on the vertical axis. Now, looking at fund A (aqua square second from the right), it has achieved a higher level of performance than fund B but has experienced much less volatility. It is clearly a superior fund, achieving higher performance with less risk.

The other factors we must also take into account when considering what a ‘good’ return means are the cost of running the investment and the impact of taxation.

Ensure you consider all costs when assessing whether you are getting a good return or not. Each fund manager will charge a percentage ongoing fee, but do not forget to factor in transaction costs on buying and selling investments.

Often more damaging is the taxation. Are you paying capital gains tax on each transaction as it occurs? Could you roll this up instead and benefit from compounding? Or are the tax implications impacting the decisions you make as an investor?

For example, a buy-to-let property that offers an attractive gross yield of 6% per annum looks like a good return on the surface, but once ongoing costs and tax are factored in, your net yield could be much lower, at around 2-3%.

Lastly, when comparing investments, you must always do a like-for-like comparison. So when you are benchmarking your investment ensure it is against its peers, for example, there is no point in comparing the gross return of your buy-to-let property against a BP stock you hold.

Download our guide to Investment Risk

How are my savings and investments taxed as a Portuguese resident?

By Mark Quinn
This article is published on: 9th February 2022

09.02.22

You are probably quite au fait with your home country’s investment structures, options, and practices, but what happens when you move abroad?

The first step in ensuring you are doing the right thing is getting a good understanding of the basic principles in your new country. Here I briefly run through the tax treatment of the most common income sources, and this should help you make a decision as to whether you should look more seriously at restructuring your wealth.

Bank accounts
Any interest must be declared in Portugal, irrespective of where the account is located or if you use it or not.

If you have Non Habitual Residence (NHR) status, interest earned on foreign accounts is generally tax-exempt in Portugal, 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 certainly be looking to restructure this.

If you are a non-NHR, all bank interest earned on foreign accounts is taxed at 28% or 35% for blacklisted jurisdictions. It is possible to opt for this to be taxed at scale rates instead, but this will have an impact on the taxation of other assets, so it is best to discuss this with your accountant when making your annual return.

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 generally 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% (or 35% if from a blacklisted jurisdiction) but there is potential for tax savings if you can restructure.

Rental income
For NHRs, rental income from non-Portuguese property is possibly exempt with progression. This means that although it is not taxed, the income is added to your other income sources for the year and counted when running through the tax bands.

It is also likely that this type of income will be taxable in the country that the property is located and in Portugal. Taking UK property as an example, you will declare and pay the relevant tax in the UK and also declare this income in Portugal. Whilst with NHR, there is no further tax to pay in Portugal, you could be paying tax in the UK if the income exceeds your annual allowance.

For those with large property portfolios, it might be worth restructuring during the NHR period to take advantage of the capital gains tax break and reinvest the proceeds in a more tax-efficient way, because post NHR this income is taxable at scale rates in Portugal.

Rent from Portuguese property is fully taxable at scale rates, so is not a very tax-efficient source of income and you could generate a more tax-efficient income from other sources.

Pension income
Those with pre-April 2020 NHR have tax-free pension income and those who applied later still enjoy a flat 10% rate.

How your pension is taxed as a normal resident is dependent on the type of pension and its source. Generally, they can either be taxed at the scale rates of income tax, treated as long-term savings or an annuity. This taxation can eat heavily into your spending power, so it might be worth rearranging your pensions for better tax efficiency.

Feel free to contact us if you would like to better understand how you can position yourself for your new life in Portugal.

Trusts and their treatment in Portugal

By Mark Quinn
This article is published on: 31st January 2022

31.01.22

Trusts in the eyes of the Portuguese authorities

Trusts are a legal arrangement for managing assets and there are many types of trusts. They are a construct of the common law system and have been used for centuries. Portugal, like much of Europe, has a code-based civil law system; conversely, the UK has a common law system. As such, Portuguese law does not recognise the status of trusts but this does not stop them from applying tax on any distributions received by a Portuguese resident beneficiary of a trust.

Trusts are a very common planning tool; however, they have increasingly become under scrutiny by tax authorities around the world because of their lack of transparency and use in abusive tax planning.

The area of trusts is huge, and we will focus here only on their treatment in Portugal. If you are considering a trust for any reason, you must seek advice from a suitably qualified person to ensure you achieve your objectives and fully understand any financial implications for you and/or your beneficiaries.

What are trusts used for?
There are many reasons why someone might set up a trust, such as:

Tax planning – settling assets into a trust can reduce or in some cases, remove an inheritance tax liability, assuming certain conditions are met
To control and protect family assets – the trust controls who can receive benefits, when and in what proportion. This can be valuable for beneficiaries who may not be able to responsibly manage large sums of money or need help in managing complex structures, or to say, protect wealth in the event of divorce
To protect minor beneficiaries or incapacitated beneficiaries – the protection of a trust can ensure minors or vulnerable beneficiaries are looked after, and the funds are used for their sole benefit
To pass assets to beneficiaries during or after your lifetime – you can settle assets into trust during your lifetime or on death, and importantly maintain a level of control over the gift. When assets are passed on via a will, there are no controls in place and the beneficiary can do as they wish with the gift
Avoid probate, allowing family members to access funds to pay inheritances taxes, or help with expenses before probate is granted
Unlike probate which is public record, trusts are private

The type of assets that can be put in trust are cash, property, shares and land.

How it is structured and who is involved?
The settlor(s) is the person settling the asset into trust. They can either be a beneficiary of the trust or excluded from benefiting from the trust.

The beneficiary(s) is who the settlor wishes to benefit from the assets held by the trust.

The trustees can be individual laypersons or professional trustees. There are pros and cons of each, but in both cases they must only act in the best interest of the beneficiary, responsibly manage the trust assets and cannot personally benefit from the trust. This is a legal obligation, and they are liable if they do not fulfil their duties.

The settlor decides how the assets in the trust can be used and how they should be managed, and this is recorded in the ‘trust deed’. It also details the powers of the trustees and how the trust might be changed or closed, in certain conditions.

You may also have a ‘letter of wishes’. This will have additional information that the settlor wishes the trustees to consider in administering the trust. This is not binding on the trustees, but they can be guided by this when making decisions.

I want to set up a trust and I am living in Portugal
A Portuguese tax resident can set up a trust.

They can choose to do this with any trustee (professional or individual) anywhere in the world. Some common jurisdictions are the UK, Channel Islands, Malta, Cyprus, Hong Kong and Gibraltar.

When choosing a jurisdiction, it is important to consider the robustness and suitability of the legislation in that country as this will impact the laws applicable to the trust.

The potential tax payable on establishing a trust will differ depending on the type of trust, the domicile of the settlor, and in some cases the jurisdiction it is established in.

Whether a trust is the right solution for you is dependent on many things, such as your objectives in setting up the trust, your domicile and residency, the residency of your beneficiaries, the type of gifts you wish to make, the cost and the tax implications for all parties involved.

There may also be better alternative solutions to a trust, for example, there are tax-efficient investment structures that you can use to replicate the benefits of a trust but without the punitive tax treatment.

We will not go into detail here as there are many variables but if you wish to explore this, please contact us.

Yes, I would like to talk to someone about setting up a trust

I am a beneficiary of a trust and I am living in Portugal; how will I be taxed?
Any Portuguese tax resident receiving a distribution from a trust will be taxed at 28% (or 35% if the trust is domiciled in a blacklist jurisdiction).

The whole distribution is taxed, irrespective of whether it is income or capital. This is obviously onerous and highly tax inefficient, therefore it is likely worth reviewing any trust structure you have established or are a beneficiary of.

A trust is not right for me; can I close a trust?
Whether or not a trust can be closed is dependent on the type of trust. Some are closed on the occurrence of a certain event and others can be closed by the trustee or beneficiaries.

There are usually strict rules and procedures that must be followed, but in most cases, it can be done.

If you would like to discuss your personal situation, it would be our pleasure to analyse the options available to you.

Please complete the form below.

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

By Mark Quinn
This article is published on: 27th January 2022

27.01.22

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?

Contact Mark now with your questions

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.