There’s no doubt Portugal is a fantastic place to make your home, for a whole host of reasons. but did you know it can also offer valuable financial advantages? Whether you are planning to move there, or have recently arrived, taking the right steps early on will help you make the most of tax-efficient opportunities while avoiding costly mistakes.
Tax residence in Portugal
You are usually considered Portuguese tax resident after 183 days in the country. If you arrive part way through the year, the 183 days count from the day you arrive for the following twelve months.
You could also be deemed a tax resident if you have a permanent home available to you in Portugal, even if you spend less than six months there, so be careful not to become tax resident sooner than intended.
Taxation in Portugal
Researching Portugal’s tax system is an important part of planning your move. Taking advice before you relocate can help you understand the tax implications, avoid unexpected liabilities and structure your affairs tax efficiently from the outset.
Once you are tax resident in Portugal, you are liable to Portuguese tax on your worldwide income and certain capital gains. Some other taxes only apply to assets situated in Portugal. The main taxes you should be aware of include:
- Income tax – applied at scale rates from 12.5% to 48% for income surpassing €86,634. (8.75% to 33.6% in Madeira). An extra 2.5% or 5% tax applies to certain types of income over €80,000 and €250,000, respectively.
- UK pension income – under the UK/Portugal tax treaty, most UK pension income is only taxable in Portugal. Income from government service pensions remains taxable in just the UK, though it is taken into account for aggregation purposes.
- Tax on investment income – a flat rate of 28% (35% where the assets are in a ‘tax haven’).
- Capital gains tax – gains on the disposal of shares, securities and bonds are taxed as investment income. With property, 50% of the gain is included with your other annual income and taxed accordingly.
- Property taxes – Property Transfer Tax (IMT) and Stamp Duty (IS) are payable when purchasing real estate, and rates are based on value, location and intended use. Municipal Property Tax (IMI) is levied annually on property owners, with rates set by the municipality. Additional Municipal Property Tax (AIMI) applies to Portuguese residential properties exceeding €600,000 (that amount being tax free per named owner).
- Inheritance tax – there is no ‘inheritance tax’ as such in Portugal, but 10% stamp duty will apply when Portuguese assets are passed beyond spouses and direct line ascendants and descendants.
Optimising Portugal’s tax benefits
Portugal can be a highly attractive jurisdiction from a tax perspective, but achieving the best outcomes often requires careful planning. The way your assets, investments and pensions are structured can have a significant impact on your overall tax position. Reviewing your affairs before, or soon after, your move ensures they are aligned with your new tax environment.
One common mistake is holding onto arrangements which were tax efficient in the UK. Some investments and structures become less advantageous after relocating, potentially resulting in unnecessary tax liabilities.
Instead, take advantage of the local tax planning opportunities. Portugal offers the potential to enjoy extremely favourable tax treatment on investments. Many expatriates benefit from holding capital in a structure similar to an offshore life assurance bond that acts as an investment wrapper to a conventional portfolio. No tax is payable on the underlying income until a withdrawal is made, when only a proportion of the profit is taxable in Portugal and the effective rate drops over time.
Pensions can also benefit from tailored planning. If you are considering accessing or encashing pension funds, specialist advice is essential. In the right circumstances, it may be possible to access the funds at preferential rates between 7% and 12%.
Timing your move and selling assets
Once you decide to move to Portugal, research and consider the best time to sell your UK assets, whether property, a business, shareholdings or other investments. Depending on circumstances, you may pay less capital gains tax by selling as a UK tax resident rather than a Portuguese resident, or vice versa.
The timing of your move can also make a significant difference. As the UK tax year runs from April to April, while Portugal’s follows the calendar year, there can be valuable tax planning opportunities.
Timing is also important if you plan to take a lump sum from your UK pension. Once you move to Portugal, the entire lump sum is generally taxable there. If you take it while still UK resident, you can normally benefit from the 25% tax-free pension commencement lump sum.
Blevins Franks’ cross-border advice will help you coordinate the timing of your move and any asset sales to minimise your overall tax liability.
A financially secure retirement
If you’re already enjoying retirement in Portugal, weigh up your pension options to establish which is best for you. Factor in your circumstances, objectives and other accessible wealth, and the tax implications in Portugal and UK – particularly now that the UK will begin applying inheritance tax to many unused pension funds.
It is also sensible to review your wider savings and investments, including the currencies you hold them in. Your circumstances and goals change after relocation, so reassess your overall financial plan to ensure it supports your new lifestyle. Confirm that your portfolio reflects your objectives, time horizon and attitude to risk, with appropriate diversification to manage investment risk.
With the right planning, Portugal offers an excellent environment in which to enjoy retirement and preserve your wealth. Our Blevins Franks advisers will help ensure your finances are arranged as tax efficiently as possible, allowing you to make the most of the opportunities available while supporting your long-term financial security.
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