Taxation of pensions in Portugal is complicated. The type of pension, how it is funded and how it is paid out can affect the rate of tax you pay and it becomes even more confusing when you have to consider potential taxes in the source country. Mark and Debrah examine the rules on taxation and the steps you should take to save your hard-earned cash.
Pensions in Portugal
By Portugal team
This article is published on: 13th July 2023
13.07.23
Over the years we have seen different ways of reporting pensions in Portugal. This is because the Portuguese rules do not quite fit the complex UK pension rules and there is also a lot of confusion, even amongst professionals, about the nature of pensions. Sometimes this results in a favourable outcome, but in other instances, we have seen people paying more tax than they need to.
What is a pension in Portugal?
Portugal views a pension as a regular series of income payments. This can get confusing as from a UK context, pensions can be paid out as a series of income payments or lump sums.
Portuguese law does not specify a time period for payments to be deemed a pension, but it is generally considered amongst professionals that payments made on predetermined dates and at predetermined amounts would be deemed pension income.
Ad hoc payments could be deemed lump sums and would receive different tax treatment (as long there were no employer contributions). Here, the growth element is taxed at 28% and the capital is returned free of tax. There is a tax reduction of 20% after 5 years and 60% after 8 years. It is best to speak to your accountant on reporting options as they will be performing your submission.
UK Government pensions
These pensions are acquired by working for the state. In the UK these are generally armed forces, local authority and some types of NHS pensions (a full list can be found on HMRC’s website).
These are always taxable in the source country and tax is deducted at source. Portugal does not tax these pensions, but they must be reported in Portugal, and they do count when assessing your other taxable income in Portugal.
All other pensions are taxable in Portugal (not the UK) and each person has an annual deduction of €4,104 against pension income
UK state pension
The UK state pension is taxable in Portugal only. No tax is due in the UK. The pension can be paid out free of tax to you from the UK once HMRC are satisfied you are no longer a UK resident. Otherwise, UK tax will be deducted at source and you must reclaim this.
For Non-Habitual Residents (NHR), the tax due in Portugal is 10% (unless you have pre 31st March 2020 NHR, in which case it is 0%). For normal residents, scale rates of tax apply which for 2023 are 14.5% to 48%.
Occupational pensions
These pensions are funded solely by an employer, or by employer and employee contributions from pre-tax income.
If you can determine the split between employer and employee contributions, the former are taxed at the prevailing rate and the latter can receive 85%/15% treatment i.e. 85% is returned free of tax and 15% is taxed at the prevailing rate. If this cannot be determined, the whole amount will be taxed at the prevailing rate of tax.
For NHRs, the rate is 10% (or 0% for pre-2020). For non-NHRs, it is the scale rates of tax.
Personal pensions
Where a personal pension was solely funded by personal contributions made with after-tax income, then it is possible to apply long-term savings taxation rules which can be more favourable. Here, only the growth element of any income received is taxed at 28%, with tax reductions after years 5 and 8 resulting in effective rates of tax of 22.4%and 11.2% respectively.
If there are contributions made in resect of employment activity e.g by an employer or via pre-tax income, then scale rates are likely to apply to the full pension, unless you can distinguish between the contributions.
What about the 25% PCLS?
Portugal does not recognise the UK concept of a 25% pension commencement lump sum. So, if your retirement plan is to take this, then it is best to do it whilst UK tax resident. If taken once resident in Portugal, the above tax rates will apply.
Get your UK pension paid out to you gross
Firstly, you must complete a ‘DT Individual’ form. This is available online from HMRC. You then submit this form to HMRC with a proof of residency in Portugal certificate, which you can obtain from the finances portal. You will need to take an income from the pension to trigger the process, which is likely to be emergency taxed so just take a small amount. Once your provider receives notification of a ‘nil rate tax code’ from HMRC they will pay your pension out to you without deducting UK tax.
What else should you be aware of?
The UK government recently changed the ‘lifetime allowance’ (LTA) rules. Contrary to the common belief that this has been ‘abolished’, the rules actually state that no charge will apply for 2023/24. This difference is important for those thinking of taking their pension benefits during this window of opportunity.
Previously the LTA was capped at £1,073,100. After which pension savings suffered a tax charge of 25% if taken as income or 55% if a lump sum. Lump sums were taxed more heavily as it assumed that 25% represented the LTA excess charge and a further 25% represented an income tax charge. The new rules remove the 25% LTA excess charge but not the 25% income tax charge, so when taking amounts above the LTA as lump sums, a 25% deemed income tax charge will still apply.
Either way, this provides a unique opportunity for those with large pension pots. This opportunity however is not guaranteed for the future as commentators believe that a Labour win in the next election will likely see this reinstated.
Lastly, currently, assets within a pension can be passed down free of UK inheritance tax (IHT) and they have become crucial planning tools for UK domiciles. Similarly, income tax is not payable by beneficiaries if the pension holder dies before age 75 (tax is payable if death occurs after 75).
There have been ever-increasing murmurings of the introduction of inheritance tax applying to pensions and income tax being imposed on beneficiaries where death occurs before age 75. The most recent and serious being at the end of 2022 when the Institute for Financial Studies published a report recommending changes to the rules and stating that these changes could bolster government funds by £1.9 billion.
It could be an opportune time for you to review your pension planning with this and your beneficiaries in mind.
Investment options for Portuguese residents
By Portugal team
This article is published on: 12th July 2023
12.07.23
You are probably quite au fait with your home country’s investment structures, options, and practices, but what happens when you move abroad? Just because your investments are tax efficient in one country does not mean that the tax advantages will transfer to another.
Mark Quinn and Debrah Broadfield look at the taxation of typically held investments in Portugal and what options are open to residents looking to legally shelter from taxation.
Bank accounts
All bank interest is reportable and potentially taxable in Portugal, irrespective of where the account is located or if you use it or not.
If you have Non-Habitual Residence (NHR), interest earned on foreign accounts is tax-exempt, 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 consider restructuring this.
If you are a non-NHR, all bank interest earned on foreign accounts is taxed at 28%. Similarly, 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 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% but there is the potential for tax savings if you can restructure.
Property
Foreign-sourced property income is reportable in Portugal but is tax-exempt during NHR. Post-NHR, this income is taxed at scale rates (up to 48% plus solidarity tax at 2.5%/5%) with a credit given for tax paid in the country where the property is located (if there is a double tax treaty).
NHR does provide a unique tax-saving opportunity when selling a foreign property. Usually, 50% of any gain on sale is taxed in Portugal at scale rates, but if sold during the NHR period there is no tax to pay. Do note however that tax may still be due in the country where the property is located.
Striving for tax efficiency
One of the most common and tax-efficient ways to save is within an ‘offshore investment bond’. Such structures are recognised throughout most of the EU and in the UK.
Unlike a standard investment portfolio, that attracts capital gains and income tax as it arises, gains within an investment bond grow free of both income and capital gains tax. This is also known as ‘gross roll up’ and works in a similar way to a pension or a UK ISA.
The other main advantages over directly held investments are:
– You can control the timing of taxation. With standard investment holdings, when income or dividends are produced, they are deemed paid (whether actually paid out to you or not) and are taxable on an annual basis. With a tax-sheltered structure, income and gains are only taxable when a withdrawal is made.
– Withdrawals are very tax efficient. Withdrawals are split into capital and growth and tax is only payable on the growth. Although the tax rate on the growth element starts at 28%, you enjoy a 20% tax reduction after 5 years and a 60% tax reduction after 8 years.
It is worth knowing that this preferential tax treatment is enjoyed by both NHRs and standard Portuguese tax residents. And because the structure becomes more tax efficient over time, these are great long-term planning tools for those with NHR who intend to remain in Portugal once they are subject to the standard rates of tax post-NHR, or for long-term residents without NHR.
– These structures offer a unique tax planning opportunity for those who might return to the UK in the future. Under UK rules, only investment growth generated whilst resident in the UK is taxable. So, for those who have spent many years abroad in Portugal, this can create the opportunity for very advantageous tax planning on a return to the UK.
Lastly, choosing the right jurisdiction and provider is essential to ensure compliance in Portugal. You will also want to avoid jurisdictions with withholding taxes and bonds located in tax havens, as these are punitively taxed at 35%.
Tax embargo in Spain for incorrect declaration of taxes
By Chris Burke
This article is published on: 10th July 2023
10.07.23
When moving to Spain you find out pretty quickly that the way things work here, bureaucratically and lawfully, are very different from the rest of the Western world, particularly the UK. One such example is if you are suspected of making an incorrect tax declaration or filing. Even if advised by your accountant/tax adviser to do so, you are liable and not them. In Spain, simply put, you are guilty until proven innocent of any suspected wrong doing.
With that in mind, one major example is of a self-employed person having their taxes filed incorrectly by their accountant and being unaware. At some point in the future the individual is notified that they have not responded to the tax office’s request to query this, and thus immediately have their income ‘embargoed’ and the monies they are suspected to owe are either taken from their Spanish bank account and/or taken at source from their main customers/invoices.
In one particular instance the tax office claimed they had ‘written confirmation’ that the notice of their investigation was delivered 3 times, however this confirmation is a signed document from the post office delivery person saying they were delivered, not the recipient signing to say he or she received them. Then, due to you not responding, the case is now closed and you are guilty by not replying, thus the money they believed you owed, you now owe and must be paid.
I have seen this happen many times over the years and cause considerable pain and suffering to people. Imagine the tax office saying you owed them €40,000 then taking it from your bank account, or deducting it each month as you received invoice payments. How do you then pay your bills? And in all of this, you are the complete innocent due to your accountant wrongly declaring your taxes.
What can you do? Well, the process is threefold:
- Firstly, you have to contest the ruling and see proof of what they are finding you guilty of (e.g., incorrectly filing) and that they actually delivered the documents to you.
- Secondly, if you feel their ruling is incorrect, appeal against it explaining why.
- Thirdly, as the appeal will likely be unsuccessful you then go through an ‘arbitration’ process where your likelihood of winning is approximately 75% and above.
The bad news is this process normally takes between 3-5 years. If you win, you will receive your money back plus some interest. If you lose, the European courts are your last option.
My best advice for anyone to avoid this is:
- Make sure you are confident in the accountant you are using to reduce the chance of this happening.
- Always make sure your address on file at the tax office is up to date.
- Only keep in a Spanish bank account money you need to live on. The tax office cannot legally take money from bank accounts outside of Spain unless they go through a court process.
If this has happened to you feel free to get in touch – I can recommend a law firm/accountant that has experience in this field and has been successful. Alternatively, if you would also like a recommendation for an accountant that won’t make these mistakes (hopefully, in Spain it’s never 100%!) then again feel free to reach out.
Click here to read independent reviews on Chris and his advice.
Citizenship or Residency in Italy?
By Gareth Horsfall
This article is published on: 10th July 2023
10.07.23
Cittadinanza v Residenza – which to choose?
I decided to write this article because a number of people have asked me about the tax advantages of becoming an Italian citizen. My aim here is to give some clarification on the financial planning considerations if you are thinking about a permanent stay in Italy.
I opted for Cittadinanza as a result of Brexit. When my EU acquired rights were going to be stripped away from me I needed to make some decisions and for me cittadinanza was the right thing to do (with an Italian wife and child in Italian school, it seemed a no-brainer). Thankfully, as a resident in Italy married to an Italian my cittadinanza seemed to be right of passage rather than any decision that the preffetura took. I was lucky and I also managed to squeeze in before the language test was introduced…phew! (although I could pass that now).
If you are left wondering which option is best for you, I thought I would write this article to help lay out some facts. I hope it helps.
Cittadinanza and residenza
They are 2 very distinct definitions, often confused, but inherently connected from a legal and fiscal point of view.
As ‘stranieri’ living in Italy it is not unusual to get confused by some of the terminology regarding our legal status, and for Brit’s who were resident in Italy pre-Brexit, they now have additional legal implications which they have to deal with. For the rest of the non-EU world, you have probably been experiencing some of these issues that Brits are now facing. for some time, so you could probably tell us a thing or 2 about it.
The Universal Declaration of Human Rights 1948 states that every individual, in every part of the world, has a right to legal citizenship. No individual can be arbitarily stripped of their legal citizenship, nor of the right to change it.
What is cittadinanza?
Cittadinanza is simply defined as the condition of an individual belonging to a state with the rights and duties that this relationship entails; among which are political rights, i.e the right to vote and the possibility of holding public office, and the duty of loyalty to the state and the obligation to defend the state, within the limits and methods established by law.
Cittadinanza gives the individual the right to vote, access to public services, diplomatic protection and legal recognition. It can be acquired by birth (ius soli o ius sanguinis), by marriage or naturalisation and every country has it’s own different criteria for obtaining cittadinanza.
Advantages
Cittadinanza has some distinct advantages, such as the right to vote in national elections, unlimited travel with the passport, access to social and health services and protection by the government.
Requirements for application
In the case of Italy, a language test must be passed to level B1, declaration of prior residence in other countries is required, evidence that you don’t have a criminal record in other countries and income requirements etc. In addition, specific requirements may be needed depending on whether you are applying based on birth, marriage, or residency.
What about ‘residenza’? What is it?
Residence is the place that an individual is considered fiscally resident.
Residence determines the obligation to pay taxes in a specific state or jurisidction. Generally speaking it is based on the period of time that one spends in a country but is also determined by other factors such as whether you are registered in a specific country and whether it is your habitual abode i.e the place where you spend most of your time. (Read on for more details on this).
Residence refers to the legal status of an individual in a country and guarantees the right to live and work without citizenship. Residenza, in much the samw way as cittadinanza has a number of advantages, such as the right to access health care the option to work, buy property and make investments in Italy. Residenza can be temporary or permanent and the permesso di soggirono comes in various forms. To obtain residenza an individual must satisfy various documentary requisities, financial criteria and possibly language competency (not necessarily)
Quick note 1. I am frequently asked whether being registered at the Anagrafe constitutes fiscal residency. The answer, in the main is YES. There might be situations for business people, for example, who have interests in Italy and other countries and who require residenza anagrafica but not ‘fiscale’, for their business needs. However, for the majority of people who are coming to live and reside in Italy there will be no doubt that your fiscal residency is in the country if you meet just ‘ONE’ of the criteria below.
(**US citizens can transfer their residency to Italy but will have an obligation to report in the US as well. This creates numerous tax and financial planning issues and so should be planned carefully**)
Quick note 2. Is it possible to be a resident of nowhere because you travel extensively and do not spend more than 183 days a year in any one country? This is absolutely NOT possible! By definition, every individual must have a place of habitual residency whether you spend 183 days a year there or not. You cannot choose your residency status. It is a matter of fact!
Definition of residenza in Italy
You must remember that the definition of residenza in Italy is defined through the income tax code and therefore residenza and taxation are intrinsically connected. An individual is considered subject to taxation and fiscally resident for the majority of a tax period (calendar year) if they meet one or more of the following requirements:
1. You are registered at the anagrafe
2. You spend more than 183 days a year in Italy, i.e it is your habitual abode.
3. You are domiciled in Italy. (Your domicile , by Italian definition, being the place where you have established your main centre of business and/or personal and affairs.
Differences between cittadinanza and residenza
Whilst different concepts they do coincide with each other. As we have already established, cittadinanza determines your citizenship whereas residenza determines that you are fiscally required to pay taxes in Italy. You can be a citizen of Italy but also reside in another country and visa versa. The principle differences however, are as follows:
- Legal Status: Cittadinanza constitutes a legal and political status with certain rights specific duties. Residenza fiscale relates exclusively to the fiscal rules and regulations.
- Acquisition: Cittadinanza can be acquired through birth, marraige and naturalization rights, whereas ‘residenza fiscale’ is determined, principally, by how much time you spend, or are allowed to spend, in Italy
- Permanence: Cittadinanza is usually permanent unless it is revoked or voluntarily renounced, whereas residenza can change over time according to your personal and/or economic circumstances.
- Rights and privileges: Cittadinanza offers certain rights, as discussed above, whereas residenza merely affects your tax obligations, tax benefits and residency rights in Italy.
Does your tax position change if you obtain cittadinanza
This is a particularly pertinent question for Brits who lost their EU national status as a result of Brexit but which is also interesting to other nationalities who decide to live in Italy, and who may also want to obtain cittadinanza.
The simple answer is that your fiscal tax status will NOT change as a result of moving from residenza to cittadinanza. However, there are cases, which vary from country to country and therefore you will need to either refer to the double taxation treaty yourself or get a professional to look for you.
In general the main fiscal difference between cittadinanza and residenza is regarding government derived pensions (pensions paid by the state, which you worked for, and are directly linked to the type of employment i.e teachers, military, police, health care professionals from a public setting). If you are receiving a pension from a government derived service then with residenza it will normally be taxed ONLY in the state in which the pension is being paid. However, if you obtain cittadinanza then the same pension could become subject to taxation in Italy as well. Double taxation issues are dealt with in the double taxation treaty, but it may mean you end up paying more taxation in Italy on the same pension than you would be in your home country.
***Government service pensions are NOT social security or state pension payments***
State pensions and social security payments are, in nearly all cases, taxable as a fiscal resident in Italy. (Commercialisti often misunderstand these and assume they are government derived pensions from employment, as described above. They are not!
When to move to Italy and register on the anagrafe
Knowing when to move can also make the difference between paying taxes in Italy in the year you move and paying them after the next fiscal year.
If you register after July 3rd then under the 183 day rule you will not be considered fiscally tax resident in Italy until the following full calendar year (only Italian sourced income will be taxable from the point of payment). Conversely, if you do register as resident before July 3rd in any year, then you will be considered fiscally resident for the ‘whole’ calendar year.
But don’t make the following mistake that I have seen many times:
If you make a request for residence before July 3rd and let’s say you don’t have all your documentation, so you delay the application until after July 3rd. Once everything is submitted and residenza is granted, it will be back dated to the original request. This might mean you are now considered fiscally resident for the whole tax year. Therefore, benefitting from the July 3rd rule means that you MUST NOT apply for residency before this date!
The period from July 3rd to Dec 31st is a HUGE financial planning opportunity because you potentially have the tax jurisdiction in which you are currently living to take advantage of and replan your finances for a tax efficient life in Italy. One simple move might be to sell some assets to benefit from capital gans tax reliefs that Italy does not have. Pre-planning and discussion is essential. When people contact me about a move to Italy, my first question is what date are you planning on registering, and is it flexible? It gives you time and opportunities, which could make a big financial difference.
Better the money in your pocket than in the Italian tax mans pocket!
If you are in any doubt about which option might be best for you and how best to plan your finances for your life in Italy then please feel free to get in touch on gareth.horsfall@spectrum-ifa.com or on +39 3336492356.
Always happy to help!
Unlock Your Financial Success with Our Exclusive Guides!
By Peter Brooke
This article is published on: 3rd July 2023
03.07.23
As part of my commitment to providing you with the knowledge and resources to navigate the complex world of finance with ease, I am pleased that you can now download four indispensable guides that cover a range of important financial topics.
- Understanding Investment Risk
- French Tax Changes and Planning Opportunities for 2023
- Responsible Investing and ESG Funds – The Spectrum Approach
- Unveiling the Benefits of Assurance Vie – Tax Efficient Saving and Investments in France
To access these resources, simply click on each of the links.
I am a firm believer that knowledge is the key to financial success, and these guides are designed to empower you on your financial journey. Whether you’re an experienced investor or just starting out, these guides offer valuable insights to help you make well-informed decisions.
Understanding Investment Risk
Investing can be both rewarding and challenging – in this guide, we try to demystify investment risk. I believe risk can be thought of like energy: it is neither created nor destroyed, it simply changes from one category to another.
↵Click the image to find out more.
French Tax Changes and Planning Opportunities for 2023
Taxation is a crucial aspect of financial planning, particularly if you reside in France or have financial ties to the country. Our guide summarises the current French tax landscape for 2023 – providing you with an overview of tax changes and planning opportunities.
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Responsible Investing and ESG Funds – The Spectrum Approach
Environmental, Social, and Governance (ESG) investing has gained significant momentum, allowing investors to align their portfolios with their values. This guide delves into the world of sustainable investing, providing insights into ESG principles, investment strategies, and the potential impact of ESG factors on financial performance.
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Tax Efficient Savings & Investments in France 2023
Unveiling the Benefits of Assurance Vie
Assurance Vie is a popular long-term savings and investment product in France. Discover the advantages, tax benefits, and investment options associated with Assurance Vie in our comprehensive guide. Learn how to leverage this powerful tool to secure your financial future.
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Remember, I am here to support you. If you have any questions or need further assistance, please feel free to reach out via the below contact form, or the booking system below.
Reducing Spanish tax
By John Hayward
This article is published on: 27th June 2023
27.06.23
Use a beneficial savings structure
Investing money is often seen as a risky thing to do even though it is generally understood to be necessary. For example, those receiving pension income would not be in the same position if the companies paying the income had left all of the pension contributions in a current account or in a box under the bed.
Financial markets can be volatile (always, I hear you shout). We fully appreciate this. We also acknowledge that inflation has created higher interest rates. Better news if you are a saver but not so pleasant for mortgage payers, or parents having to help their children pay off increased debt.
Let us imagine that, for the foreseeable future, we have high inflation accompanied by higher interest rates. Using an amount of £500,000, I have compared depositing in a savings account with investing in a Spanish compliant investment bond and I have used an interest/growth rate of 4%. I have based my comparison on the bond paying growth to the bondholder’s bank account and using GBP as I cannot see any Euro accounts paying 4%.
– £500,000 at 4% = £20,000
– Using an exchange rate of 1.16 £/€,
– £20,000 = €23,200
The deposit account interest is taxed in full and, at current 2023 rates, is €4,752 each year. This has to be declared in the annual tax return.
The Spanish compliant bond attracts tax on the gain within the withdrawal. I have based the calculation on the same amount being withdrawn i.e., €23,200. In the first year, the taxable gain within this is only €892 and the corresponding tax is €170. The taxable amount within the bond income increases over time but, over 10 years, the tax is:
– €47,520* on the deposit account interest
– €8,381* on the bond income
This gives a tax saving of over €39,000 over 10 years by using the Spanish compliant bond.
If no money is withdrawn from the bond, no tax is payable whereas the interest on the deposit account will continue to be taxed.
If the bondholder moved back to the UK, and nothing had been withdrawn whilst living in Spain, any growth on the bond whilst resident in Spain would be ignored by the UK tax office.
As an added benefit of reducing taxable income, wealth tax can be reduced. See this Wealth Tax in Spain article.
There can also be inheritance tax benefits with the bond when compared to the deposit account.
Well managed portfolios have consistently outstripped inflation. Conversely, deposit interest rates offered to savers have consistently under-performed inflation over the years.
To find out how we can help you with your existing investments and tax planning, and provide you with ideas for the future, contact me today at john.hayward@spectrum-ifa.com or on +34 618 204 731 (WhatsApp)
* E&OE. The above is a simplified example for illustrative purposes and general guidance only.
How to reduce Wealth Tax in Spain
By John Hayward
This article is published on: 21st June 2023
21.06.23
Earlier this year, I wrote an article about the introduction of solidarity tax in Spain. This is a “temporary” (we shall see) tax on wealth for those with more than €3,000,000 in assets. This is in addition to wealth tax although any wealth tax due can be deducted from the solidarity tax bill. (This is not the case for residents of the Madrid or Andalusia regions as there is no Wealth Tax currently).
I have been working with clients who are affected by these taxes, trying to find ways of reducing the tax liability. Reducing wealth by gifting to, say, children is an option but that can create additional immediate tax problems. Also, for a number of different reasons, some clients are not willing to gift anything in their lifetime.
The amount of wealth Tax that has to be paid can be governed by income. Your income tax and wealth tax cannot exceed 60% of your total taxable income.
Example:
– Total taxable income is €40,000
– Tax payable €8,000
– Assets subject to wealth tax €3,000,000
– Wealth tax due €39,000
– The maximum that can be paid when adding income tax and wealth tax together is 60% of the total taxable income (€40,000).
– €40,000 x 60% = €24,000
Therefore, the maximum wealth tax that can be paid is €16,000 (€24,000 less €8,000 income tax).
However, having to pay €16,000 a year in wealth tax is still not particularly nice. What we can do is look at the income in order to see if this can be restructured. Notable targets for this type of planning are savings interest (more relevant at the moment) and income/dividends from shares and investment funds. By careful planning, we can provide the same level of income yet reduce the tax. Please visit this Tax Benefits of a Bond page which illustrates one of the major benefits of a correctly structured investment bond which not only reduces income tax but also helps to reduce wealth tax.
To find out how we can help you with your existing investments, pensions, and tax planning, and provide you with ideas for the future, contact me today at john.hayward@spectrum-ifa.com or on +34 618 204 731 (WhatsApp)
Financial update June 2023
By Katriona Murray-Platon
This article is published on: 19th June 2023
19.06.23
Tax season is drawing to a close. However this year there is still something you need to make sure you have done before you can get out there and enjoy the summer weather.
You may still need to do the property declaration that I mentioned in my February edition. The declaration service has been available for several months now and so enough time has passed to be able to address some of the issues that have arisen.
Just as a reminder, if you own a property, and therefore pay taxe foncière, you have to declare the buildings on the land you own if they existed on 1st January. Because the Taxe d’habitation has been scrapped for main residences the French authorities want to find out which buildings are occupied and rented (even if just for holidays) which will allow them to more accurately establish the taxe d’habitation on second homes this autumn.
You must declare anyone who is occupying a property which belongs to you, even if it is a family member living there for free. However if you are only renting a room in your house, you do not need to declare this separately.
If the ownership of the property is divided between the bare owners (nu proprietaries) and the beneficiaries (usufruitiers) it is the latter who should declare the property on their online tax account.
You may have noticed that any outhouses, sheds and garages also appear on the declaration. If these have been converted to be rented or are simply let as parking spaces, they still need to be declared. A garage that is less than 1km from the main house is considered as adjacent to the property and therefore may be included in the surface area calculation for the taxe d’habitation.
The declaration can only be done online. If you do not have access to the internet (or know someone who doesn’t) or if you or they are really having problems completing this form online, you can call the tax office on the number below or make an appointment with your local tax office and they can assist you. Some post offices also have someone there who can help you with administrative matters.
If you have any problems with the declaration you can call the tax office on 0809 401401 or use the messenger service and the drop down menu to select the problem.
If you have an elderly resident who has gone into a home but has kept their former home and it is rented, they still need to declare it. There is an exemption from taxe d’habitation for residents of retirement homes (Ehpads).
If you rent a property you have to declare what kind of rental it is (long term or holiday let) and the identity of your tenants but you don’t need to declare the actual rent received just yet, this will only become mandatory in 2025.
You have until the end of June to complete this declaration so do take your time to make sure that the information is correct.
As always if you have any questions on this or any other matters please do get in touch!
Taxes and property in Portugal
By Mark Quinn
This article is published on: 15th June 2023
15.06.23
Many expats will be surprised to discover that even when selling their main home in Portugal, Capital Gains Tax (CGT) applies.
They may also not realise that when selling secondary or rental properties, tax is likely to be due in both Portugal and the country where the property is located. So, what do you need to know?
CGT
Portuguese residents are subject to CGT on their worldwide property gains. On the sale of Portuguese property, the tax treatment is the same for Non-Habitual Residents (NHR) and non- NHRs; 50% of the gain is added to your other income in
that tax year and taxed at scale rates.
For overseas property, there is no tax due in Portugal for NHRs but there is tax due (in the same manner as above) for non-NHRs. CGT is also likely due in the country where the property is located.
Can you mitigate any tax?
Despite the potential for eye-watering tax levels, some reliefs are available if the property you are selling is your home. The two mentioned reliefs can be used in isolation or conjunction.
- Main residence relief: You can mitigate all (or a portion of) the CGT by reinvesting the sale proceeds (not just the gain) into another property in the EU or EEA. Any amount not reinvested is taxed
- Reinvestment into a qualifying 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
NHR tax opportunity
For those with overseas property portfolios, selling these during the 10-year NHR period is much more tax efficient as the gain is exempt from CGT in Portugal. But hat 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 UK CGT allowance to deduct (additional reliefs may also apply depending on your situation). If you bought an investment property in joint names 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, and assuming linear growth, you only pay tax on the gain since April 2015 i.e. £210,000.
You can effectively ‘wash out’ a large part of the gain simply by selling as a Portuguese tax resident and generating cash to fund your lifestyle.
Portugeuse residency and taxes
By Mark Quinn
This article is published on: 12th June 2023
12.06.23
Residency, domicile, visas and non-habitual residency… it can be confusing. Mark Quinn and Debrah Broadfield of the spectrum IFA group explain NHRs generous tax breaks, tax planning opportunities, and how to reduce or even eliminate income and gains tax on savings and investments.
Legal residence
Legal residence relates to the right to reside in a particular country. 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 – a common visa route is the D7 or ‘passive income visa’.
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 taxing rights 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 Portuguese 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. ‘Non-habitual’ actually refers to the requirement that you must not have been resident in Portugal in the five years prior to application.
You must apply for residency before you can apply for NHR. On obtaining residency, you have until the following 31st March to apply for NHR. If you miss this deadline there is no second chance to apply.
Domicile
Domicile is something that is often confused with residency. Your domicile does not affect your income tax position, but it does affect your liability to UK Inheritance Tax. It is most likely to be a consideration for British nationals, individuals married to British nationals, or those who are not British but spend a considerable amount of time in the UK.
UK domicile is very adhesive and is difficult to shed; moving to Portugal does not automatically remove your liability to UK inheritance tax, no matter how long you have been out of the UK. Likewise, simply sheltering the bulk of your assets in a trust or QNUPS is unlikely to protect assets from UK IHT.
Tax liabilities in Portugal
Tax residents of Portugal must declare their worldwide income and gains in Portugal. For those with assets in several countries, you might also have tax and reporting obligations in the jurisdictions where you hold the assets e.g. UK rental income is always taxable in the UK but is also reportable and taxable in Portugal. Whether you will pay tax twice depends on the Double Taxation Treaty between the two countries, but there are usually rules in place to avoid this happening.
Potential pitfalls
Many people believe that, as long as they are paying tax somewhere they are meeting their obligations, but this is not correct. It is important that you have a clear understanding of where you are resident to avoid being taxed in more than one jurisdiction or being fined.
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 five years.