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Tax saving tips for Portugal

By Mark Quinn - Topics: Portugal, Tax in Portugal, tax tips
This article is published on: 17th October 2022

17.10.22

Ideally, tax planning should start before you move to Portugal as this gives you the most flexibility and more planning options. However, residents can still take many steps after their move to reduce tax. Here are our 15 top tips.

Before moving to Portugal

  1. Review your asset base, do you intend to restructure your investments for life in Portugal? Look at whether they can be surrendered tax-free or at a reduced rate in your originating country, rather than leaving it until after your move
  2. Utilise any remaining carried forward losses and income and capital gains tax allowances prior to leaving your originating tax jurisdiction
  3. Take your 25% tax-free pension commencement lump sum (tax free cash) if you are UK resident. This is not available following your move to Portugal and will be taxed
  4. If you are moving from the UK and are non-UK domiciled, consider using the remittance basis to substantially reduce certain taxes before your move
  5. If your UK-based pension savings are close to or above the UK Lifetime Allowance (LTA) of £1,073,100 you must consider LTA protection. Any amount above this is taxed at 25% or 55%, depending on how the pension is drawn down. This tax could be avoided or mitigated
Tax saving tips for Portugal

After moving to Portugal

  1. Apply for Non-Habitual Residence (NHR). In the vast majority of cases it is beneficial but please seek personalised advice to confirm how this will affect your position
  2. If you are NHR, restructure your income sources and assets to take advantage of the tax breaks
  3. Holding investments directly can give rise to unnecessary capital gains and income tax. Using a wrapper such as a pension scheme, company or life assurance bond, could substantially mitigate tax
  4. Conventional planning dictates that you should maximise the value left in pension schemes given they are free of UK Inheritance Tax but the NHR regime turns this conventional wisdom upside down as you have a 10-year window to extract pension funds at a very low tax rate of 10%, after which tax can rise to over 50%. Advice must be sought before deciding to do this and must be tailored to your family situation
  5. Do things in the correct order. For example, if you have losses on certain investments realising these first could allow you to offset these against future gains but if you realise the gain first you cannot do the opposite
  6. Targeted withdrawal strategies. Funding your lifestyle from certain sources rather than others can save substantial amounts of tax. These may need to be switched over time e.g. when the NHR period ends
  7. The UK Non-resident Capital Gains Tax rules. If you are selling UK property as a Portuguese resident, only gains made from 6th April 2015 are taxable in the UK with no further tax to pay in Portugal if you have NHR
  8. If you are selling your home in Portugal capital gains tax is due on 50% of the gain at scale rates. There is main residence relief if you use 100% of the proceeds to buy a new home, but a new relief was introduced which allows certain individuals to invest the proceeds in a pension or investment instead, allowing you to release capital and provide a future income
  9. You can submit joint tax returns as a couple (you do not have to be married) in Portugal so you can take advantage of your partner’s unused tax bands
  10. Take advantage of the Portuguese personal deductions. By using your fiscal number when making certain purchases you can reduce your annual IRS tax bill e.g. €250 per taxpayer for general family expenses, €1,000 on health expenses etc

Buying a property in Portugal seminar

By Mark Quinn - Topics: Portugal, Property in Portugal, Tax in Portugal
This article is published on: 18th July 2022

18.07.22

Are you thinking about buying a property in Portugal?

Do you have questions about tax, currency, mortgages, the visa options available or financial planning in Portugal?

Join us on Thursday 28th July at 6pm for this live and free event to learn about everything involved in buying a property in Portugal and talk direct to our panel of experts.

Mark Quinn, our Portugal office Manager will be joining the esteemed panel including:

Buying a property in Portugal?

Portuguese capital gains tax – changes from Budget 2022

By Mark Quinn - Topics: Captial Gains, Portugal, Tax in Portugal
This article is published on: 27th June 2022

27.06.22

If shares, investments or Portuguese property were acquired before January 1989 there is no capital gains tax on sale for Portuguese tax residents. In any other instances, capital gains tax is applied at 28% to any profits made.

Indexation relief is also available if they were held for more than 2 years and is applied on a sliding scale.

For example, if you decided to surrender a UK Stocks & Shares ISA or share portfolio, the gain made on sale would be taxed at 28% in Portugal. If no gain has been made, there is no tax to pay. There is no exemption for NHRs.

However, the Portuguese Budget for 2022 which was approved on 27 May 2022 introduces a change with effect from 1st January 2023 regarding the taxation of ‘short-term capital gains’ i.e. gains realised on assets that have been held for less than 365 days.

For investors whose taxable income (including the short-term realised gain) is €75,009 or more, the taxation will be increased from the flat rate of 28% (or 35% for investments held in blacklisted jurisdictions) to progressive rates, which can be as high as 48% (or even 53% if your total income exceeds €250,000.)

Investors can mitigate ongoing capital gains tax on their investments by using one of several “tax wrappers” available to Portuguese tax residents. Each wrapper will differ in terms of its features and benefits and the most appropriate structure will be different for each individual.

However, the purpose of such tax wrappers is to essentially act as a ‘trap’ on any gains. This means that you can be in control of the timing of any taxable events and potentially create a much lower overall tax figure. Equally important is that the underlying fund manager is not constrained in any investment decisions by punitive tax charges that could apply to short-term transactions.

Please talk to us to assess the different range of investment options and wrappers, and what the most appropriate may be for you and your family.

Investment Property in Portugal

By Mark Quinn - Topics: Investment property, investments in Portugal, Portugal, Tax in Portugal
This article is published on: 21st June 2022

21.06.22

I’m often asked for my opinion on property as an investment, either in Portugal or elsewhere and I must admit it doesn’t tick many boxes as an investment.

For example, it is generally subject to income tax, capital gains tax and succession tax, as well as ongoing local rates. It cannot be converted into cash quickly or easily (illiquid) and it is expensive and time-consuming to maintain. It can also come with administrative issues such as unruly tenants, rental void periods and due to its static nature, it is difficult to plan around.

Having said this, property continues to be a popular investment choice as it is easy to understand and you can touch it, giving investors a sense of security and reduced risk. Additionally, we probably all know a few ‘property millionaires’. So, what are the planning angles and how can you ‘get out’ and enjoy your spoils tax efficiently?

Capital gains tax (CGT)
Portuguese residents are subject to capital gains tax (CGT) on their worldwide property gains, unless the property was purchased before 1st January 1989, in which case CGT does not apply.

For Non-Habitual Residents (NHR) selling Portuguese property and non-NHRs, CGT is due on 50% of the gain and is added to your other income in that tax year and taxed at scale rates. In addition to this, if the property is located overseas, tax may also be due in the country the property is located. However, if there is a double taxation agreement between the two countries e.g. Portugal and the UK, you should not pay tax twice on the same gain.

Portuguese property
NHR status does not have an impact on the taxation of Portuguese property. The tax treatment is the same for NHR and normal residents, but despite the potential for eye-watering levels of tax, there are some reliefs available if the property you are selling is your main home – it does not apply to rental property sold in Portugal. The two reliefs mentioned can be used in isolation or conjunction.

  1. Main residence relief: You can mitigate all – or a portion of – the CGT by reinvesting the proceeds into another property in the EU or EEA. Any amount not reinvested is taxed
  2. Reinvestment into a qualifying pension or long-term 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 but most notably, you or your spouse must be retired or above 65 and the gain must be reinvested in a qualifying structure

Non-Habitual Residence (NHR)
NHR gives those selling foreign property an advantage as gains are exempt from CGT in Portugal. But what 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 CGT allowance to deduct of £12,300 per person. Additional reliefs may also apply, further reducing any gains, but this will depend on whether the property sold was your home or an investment property.

For example, if you bought an investment property in Portugal 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, you only pay tax on the gain since April 2015. Using the straight-line method, the gain is £212,000 from which you can deduct your annual CGT allowance, leaving a taxable gain of £199,700. Assuming you had no UK income in that tax year, the tax due to HMRC would be £52,146 which is an effective rate of 5.7%.

Buying property in Portugal

By Mark Quinn - Topics: Portugal, Property in Portugal, Tax in Portugal
This article is published on: 28th May 2022

28.05.22

At the start of the buying process it is essential to sort out your residency status, financials and tax planning before you can buy a property in Portugal.

Our Portugal Manager recently spoke to Rebecca Thomson, Co-founder and Real Estate Consultant at Liberty Real Estate about the simple steps one must take before making the move.

Mark expertly explains how to apply for residency in Portugal, various visas and how to benefit from the NHR scheme.

Non-EU citizens, including the British post-Brexit, who wish to permanently settle in Portugal, must apply for a visa for the right to stay. EU citizens on the other hand have the right to freedom of movement and therefore have an automatic right to stay, so do not need to apply for a visa.

There are several visa options available in Portugal and the most common are the Golden Visa and the D7 visa.

Both visas allow access to the Schengen area, ultimate permanent residence or Portuguese citizenship, and a gateway into the Non Habitual Residence (NHR) tax scheme.

The key difference between the two programs comes down to one of cost versus flexibility. The D7 visa is clearly a lower cost route to Portuguese residency, both in terms of the fees and that there is no investment requirement as for the Golden Visa. However, the D7 route does have substantially longer minimum stay requirements.

So, if you are thinking of making a move to Portugal, or would like to benefit from the available tax incentives, watch the full interview in our informative video below.

When Non-Habitual Residence does NOT work

By Mark Quinn - Topics: non-habitual residency in Portugal, non-habitual resident, Portugal, Residency, Tax in Portugal
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.

NHR Portugal

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 - Topics: non-habitual residency in Portugal, non-habitual resident, Portugal, Tax, tax advice, Tax in Portugal
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.

where do i pay tax

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.

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

By Mark Quinn - Topics: investments in Portugal, Portugal, Saving, Tax in Portugal
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.

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

By Mark Quinn - Topics: investments in Portugal, Portugal, Property in Portugal, Tax in Portugal, Tax Relief
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?

property in portugal

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.

Selling a property in Portugal | Tax relief

By Mark Quinn - Topics: Portugal, Tax, Tax in Portugal
This article is published on: 17th January 2022

17.01.22

As I covered in my last blog post, capital gains tax is charged on the sale of all property in Portugal irrespective of your residence status, and if the property qualifies as your main residence.

There are two situations in which the capital gain is exempt from Portuguese tax:

  • If you invest the proceeds of sale into another main home in Portugal, or EU/EEA
  • If the proceeds of a property sale are reinvested in an approved long term savings plan or pension

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

Whilst the first exception is relatively straightforward, the second exemption method is slightly more involved and there are certain conditions that must be met, such as (but not limited to):

  • 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.

We can advise on the conditions and structure options in which to hold a qualifying investment.