When Non-Habitual Residence does NOT work

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.

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.