There are so many questions, so many concerns, so many areas that need clarifying. Here we dispel some of the most commonly held misconceptions for expats who have chosen to live in Portugal.
Living in Portugal
By Portugal team
This article is published on: 11th July 2023
- “I can come and go as I choose”
To determine and maintain your residency in Portugal or any other country, you will need to follow certain rules regarding the amount of time you spend there and your residence could change year on year depending on your circumstances.
For instance, if you want to avoid being subject to UK taxes after leaving, you will need to limit the number of days you spend in the UK. This limit can range from as little as 16 days to as much as 182 days.
- “I’ve left the UK so I don’t have to pay tax there”
The tax system in the UK is notoriously complex and can have lasting effects on former residents who have not properly cut ties with the country. Despite leaving the UK, you may still be responsible for paying taxes there on income, capital gains, and even after death (inheritance tax).
Additionally, specific types of income and gains continue to be taxable in the UK even after you’ve left. As a result, you may need to file an annual tax return with HMRC in the UK as well as in Portugal.
- “I’ve left the UK, so I won’t be subject to UK Inheritance Tax (IHT)”
Unlike income tax and capital gains tax, which are usually determined by your residence, your liability for UK IHT is based on your domicile status. This means that even if you no longer live in the UK, you may still be subject to UK IHT if you have a UK domicile of origin.
There are ways to minimise or eliminate your UK IHT liability, but it is a highly complex area and not as simple as setting up an offshore trust, gifting assets or establishing a QNUPS – UK anti-avoidance rules are extensive and highly effective. It’s important to seek specialist tax guidance as early as possible, as any challenges by HMRC will only occur after you’ve passed away.
- “I report my income in the UK so I don’t have to declare in Portugal, even as a Portuguese resident”
Some assume that they have the flexibility to report their income and gains wherever it yields the greatest financial benefit or where they ‘have always paid taxes’, rather than where they are obligated to pay taxes.
As a resident of Portugal, you are required to declare your worldwide income and gains and pay the appropriate tax in Portugal. You may also be required to declare income and gains in the country where assets are physically held/registered, but there are rules in place in most countries to avoid double taxation.
- “Non-Habitual Residence (NHR) means I’m not resident in Portugal”
The NHR program is a ten-year tax incentive scheme for new residents of Portugal. The name of the program can be misleading, as it suggests that you are not a resident of Portugal. In reality, NHR is intended for those who have not been tax resident in Portugal in the previous five years, and you must be legally resident in Portugal before you can apply for it.
This can lead to some confusion, causing some people not to apply for the NHR program, or even being discouraged from doing so, despite it being a financially advantageous decision in most cases.
- “NHR means I’ll pay no tax”
Although the NHR scheme offers the opportunity to attain low or even zero tax rates, it requires careful planning to achieve the optimal outcome. Simply applying for the program is not sufficient, and you must take proactive steps to ensure that you are in the best possible position to benefit from it.
For example, not all foreign income is exempt from taxation, you may need to restructure your income sources to fully utilise planning opportunities, and generally, capital gains are not exempt under NHR.
Becoming a resident of Portugal can result in significant financial and tax benefits, but it is crucial to have a comprehensive understanding of the cross-border complexities involved, such as residency regulations and tax declaration obligations. Only with a clear understanding of these issues can you take full financial advantage and achieve the most favourable outcome.