The Non-Habitual Residence (NHR) tax scheme has attracted many new residents to Portugal and has been a bonus for those relocating here for lifestyle reasons.
Looking towards the end of Non-Habitual Residence in Portugal
By Portugal team
This article is published on: 22nd February 2023
Whilst the scheme offers a 10-year ‘window’ of tax-reduced or even tax-free living, the position following the 10-year point can bring a substantial increase in tax exposure. However, with careful planning, it is possible to put yourself in a similar or even better position post-expiry of your NHR status.
Your position post NHR
After the NHR term, you are simply treated as a standard Portuguese taxpayer, and we can look at the contrast between pre and post-NHR treatment through the examples of UK property, pensions and dividends.
During NHR, any rental income from UK property is tax-free in Portugal, however post-NHR it becomes taxable at 28%.
In addition, during NHR you can sell UK property free of Portuguese capital gains tax but post NHR, you will face scale rates of tax on 50% of the gain. This difference can be particularly stark when considering the sale of a former UK main residence, as the following case of a lady we helped shows.
She purchased her UK home for £725k and the current value was £1.5m. She was unsure whether to sell her UK property shortly after moving to Portugal or to wait. Because of the timing of the sale, selling shortly after her arrival in Portugal would result in no tax in the UK and no tax in Portugal.
If she waited until after the NHR period, UK capital gains tax would be due on the gain made from April 2015 to the date of sale at 18%/28%, and additionally, tax would be due in Portugal on 50% of the gain at scale rates (up to 48% plus solidarity tax 2%/5%). Note, credit is given in Portugal for tax paid in the UK.
During NHR, pension income is taxed at 0% (for pre–April 2020 NHRs) or 10% (for post-April 2020 NHRs).
However, after NHR, this will jump to at least 28%, and possibly up to 48% depending on the type of pension and how it is reported by your accountant.
If you have the 0% pension tax rate, it is important to not deplete your pension too quickly, as taking large lump sum payments can risk an unexpected tax charge. The tax office may deem the income to be long-term savings income rather than pension. If you are in this position and wish to deplete your pension during NHR you should take advice if you have not done so already.
UK dividends enjoy a 0% tax rate under NHR but post NHR this increases to 28%.
There are solutions
The key is planning early so, whether you are nearing the end of your NHR period or just starting, you should seek guidance as early as possible.
As an example, to avoid the increase in tax on pension income, it is possible to deplete your pension scheme completely during the NHR period and reinvest in a more tax-efficient structure that will continue to provide income post-NHR but be much more tax-efficient (single-digit or at least very low relative tax rates).
For those drawing dividends from UK companies, some may be considering an exit from their business and the end of NHR can be a catalyst for reviewing options for a business sale (0% tax on the sale is achievable in certain situations).
Returning to the UK?
Some clients will have a 10-year plan to remain in Portugal whilst they have NHR status, and then relocate back to the UK when their NHR expires. For these clients, there are planning opportunities to re-enter the UK system very tax efficiently but advice must be sought on an individual basis.