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