While becoming resident is a key step in setting up home in Portugal, don’t forget to adjust your tax, investments, pension and estate planning to suit your life abroad.
The Brexit countdown encouraged many Britons to move to Portugal in 2020, perhaps earlier than originally planned and without having full time to prepare. Although this would have guaranteed citizens’ rights under the UK-EU Withdrawal Agreement, there may be financial pitfalls from rushing such a move.
Getting your tax and financial planning right from the outset makes things easier and more cost-effective for you. But even if you’ve been living in Portugal for a while, there are usually steps you can take to improve your situation.
Portugal’s tax regime
When moving to Portugal you need to prepare for a completely different tax regime to the UK. While there can be tax benefits in both countries, some opportunities may be lost if you wait until you have changed residency.
New arrivals in Portugal may qualify for the highly beneficial ‘non-habitual residence’ (NHR) regime, which offers tax exemptions on some foreign income for your first ten years in the country. If you have not been Portuguese resident in the previous five calendar years, apply for NHR at your local tax office as soon as possible after you relocate.
More about the advantages of non-habitual residence
Even if you do not qualify for NHR, you should explore the most tax-efficient investment, pensions and estate planning solutions for your individual circumstances and goals. And, before you do anything with your UK assets, make sure you understand your options and how the right timing can lower tax liabilities in both countries.
Tax on UK pensions in Portugal
While 25% of cash withdrawals can be taken tax-free in the UK, once you are Portuguese resident, they become taxable here – along with other non-government service UK pension income – at rates ranging from 14.5% to 48%. If you qualify for NHR, however, you would only pay a fixed 10%.
Take some time to review your pension options, including whether you could benefit from moving UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS). Doing this is currently tax-free for EU residents, but now that Brexit is here, the UK could potentially widen its 25% ‘overseas transfer charge’ to capture EU transfers.
See the pros and cons of transferring to a QROPS
Tax on UK investments in Portugal
Once you become non-UK resident, UK investment products such as ISAs and insurance bonds can lose their tax benefits, with interest or dividends taxable in Portugal. If you cash-in these investments as a Portuguese resident, capital gains tax can also apply. Explore alternative investment options available to residents here that offer better tax-efficiency as well as estate planning and currency benefits.
Read ‘Should you keep hold of UK investments in Portugal?’
Tax on UK property in Portugal
If you sell your main home when in the UK it escapes Portuguese tax, but once you are resident here, UK capital gains are added to your other income and taxable at Portuguese income tax rates. Again, you could enjoy exemptions if you have NHR status.
You could also avoid taxation by reinvesting the gain into another main home in Portugal (within 36 months of sale). Retirees can also avoid capital gains tax when reinvesting into an eligible insurance contract or pension fund – great news for downsizers.
Download our guide to taxes in Portugal
Estate planning for Portugal
In Portuguese succession law, ‘forced heirship’ automatically distributes certain proportions of your estate to your spouse and children, even if your will specifies otherwise. While you can elect for the relevant UK/home country law to apply to your estate using the ‘Brussels IV’ EU regulation, this can be complex and have unwelcome tax implications, so consider your options carefully.
Applying Brussels IV will not affect liability for Portugal’s version of inheritance tax. Local ‘stamp duty’ charges 10% on Portuguese assets inherited by any heirs other than your spouse or direct family.
If you remain UK-domiciled – as many expatriates do – your worldwide estate could also attract UK inheritance tax, so take specialist advice to plan accordingly.
Ultimately, careful estate planning is crucial to ensure the right money passes to the right hands at the right time.
Five questions to help future-proof your legacy in Portugal
Although the possibility of returning to live in the UK might seem remote when embarking on a new life abroad, in reality, this happens quite often. The pull of grandchildren, bereavement or illness can all be reasons to return to the UK. Again, early planning is the key to ensure your investments remain tax-efficient and your financial affairs are structured appropriately for your new home.
In any event, be sure to undertake regular reviews to check everything is still set up in the best way for your circumstances, address any new challenges and enable you to take advantage of any new opportunities.
Taking personalised, cross-border advice is the key to making the most of suitable tax planning, pension and wealth management opportunities so you can relax into your new life in Portugal.
Contact a local adviser to discuss your plans