Many British expatriates continue to hold the same investments they had set up while UK resident, but in most cases they are not suitable for their needs now and not tax efficient in Portugal.
The news that the prize money from UK Premium Bonds has been cut is a useful reminder for British expatriates that they should review their investments now that they are living in Portugal. Many UK nationals continue to hold the same investments they had set up while UK resident, but in most cases they are not suitable for their needs now and not tax efficient here.
Your investments and tax planning should be set up according to your personal circumstances and objectives. When these change you need to review your arrangements accordingly. Moving to a new country is a major change and should prompt a complete review of your wealth management to ensure it is as effective as possible for your new life.
From 1st August, Premium Bonds will pay out almost 14% less money each month, after the prize pot reduced by £7.8 million. At the same time the total number of prizes was cut by 150,000, so you have less chances of winning.
The £1 million prize will still be given away each month, but the number of £100,000 payouts is reduced from five to three. Likewise there are now only six £50,000 prizes, compared to nine previously. Fewer prizes will also be distributed lower down the prize scale.
The bonds are issued by the state run National Savings & Investments (NS&I), who said they had no choice but to cut the prize fund. As announced in June, interest rates on NS&I’s Income Bonds, Direct Saver and Direct ISA will also be reduced from 12th September.
This is another blow for savers in the UK. Private sector interest rates have fallen over the last year as a result of the government’s Funding for Lending scheme. Many NS&I products jumped to the top of the “best buy” tables and around £1.7 billion poured into NS&I, which was not actually good for the institution. It is currently not required to raise money for the government, and would be accused of abusing its position if its rates are too high. It has to balance the interests of savers, competitors and the government and so had to take action.
The average yield on Premium Bonds is now 1.3%, but of course you cannot know when or if you are going to earn anything, or estimate what sort of return, if any, you may see on your investment.
Taxation of winnings in Portugal
One key attraction of Premium Bonds is that they have always been tax free – in the UK.
You can continue to own Premium Bonds when you move to Portugal, but as soon as you become resident here they stop being tax free. All Premium Bonds winnings are taxed as interest at 28% (or at the scale rates, if you elect for this, depending on your other income).
The Portuguese taxman actually budgets for revenue from winnings in his income projections. The government is doing rather well out of prize money this year, particularly from lotteries.
From 1st January 2013, a new 20% tax is charged on all winnings from social games and the government expects to earn €55 million this year as a result. It had already reaped over €18 million by the end of the first quarter.
This was mainly thanks to the Euromillions lottery, with six of this year’s winners being resident in Portugal. This includes two €15 million prizes in July, plus a €51 million win in March.
UK investments and tax efficiency in Portugal
Besides Premium Bonds, many British expatriates also have Individual Savings Accounts (ISAs) and Personal Equity Plans (PEPs). The income derived from them is tax free for UK residents, but again, they are not tax efficient investments for Portuguese residents. The income from both cash ISAs and share ISAs and PEPs are fully taxable here in Portugal.
You are obliged to declare the earnings on your annual Portuguese tax return. The local tax authorities are likely to find out about it anyway, considering the high level of exchange of information between European countries these days.
You also need to look at your other UK investments, such as shares, unit trusts, OEICs and investment bonds, and consider how they are taxed here, both in terms of income and capital gains. Are they the most tax efficient way of holding your capital? It is unlikely.
However there are very tax-efficient investment vehicles available to residents of Portugal that can reduce taxable income, and thus income taxes. With specialist professional advice, you could enjoy extremely favourable tax treatment on your capital investments, as well as on your pension income.
26 July 2013
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.