With early and careful planning, you can make the most of tax-efficient opportunities when moving to Portugal or buying Portuguese property.
If you are thinking about moving to Portugal or buying a home there, you will appreciate that it is a fantastic place to live. But did you know living in Portugal can also offer financial advantages?
These eight key considerations can help you avoid costly mistakes while making the most of tax-efficient opportunities.
If you have moved to Portugal or are planning to relocate, you have made an excellent choice. Not only is it a beautiful place to live, Portugal offers many advantages from a financial point of view.
Brexit may mean that there is more advance planning and paperwork involved, but most UK nationals will still be able to achieve their dream of living in Portugal, particularly if they are retired.
To make the most of your move, do not underestimate the importance of early tax and financial planning. Even if you have been living here a while, you should regularly review your arrangements to make sure they are up-to-date.
These seven key considerations can help you avoid costly mistakes and take advantage of tax-efficient opportunities available in Portugal.
Where you are tax resident
Once you become resident here, you are liable to Portuguese tax on worldwide income and certain capital gains, as well as for some ancillary taxes, so you need to be prepared for this.
You are usually considered tax resident after 183 days in Portugal, but it can be earlier – potentially even the day you arrive – if you relocate with the intention of making it your home. Also, be mindful of the residency rules in your country of origin. Under UK rules, for example, you could unintentionally trigger tax residency and come back in line for British taxes again after just 16 days’ there.
If you plan ahead and have flexibility, it is possible to time your change of residency to minimise tax liabilities – and maximise opportunities – in both countries.
Your Portuguese tax bill
New residents can enjoy significant tax benefits for their first ten years through Portugal’s ‘non-habitual residence’ (NHR) regime. To qualify, you cannot have been resident within the last five tax years and should apply through the local tax office soon after arrival.
Besides offering a fixed 20% income tax rate to those employed in ‘high value-added’ professions, NHR lets you receive some foreign income tax-free or, in the case of pensions, at a reduced rate. You could also pay no Portuguese tax on gains from UK property.
Even outside of NHR, Portugal can be highly tax-efficient for expatriates. While income is taxable at progressive income tax rates up to 48%, there are often ways to lower taxes on your investment and pension income, so explore your new options.
Structures for savings and investments
A potentially costly mistake for expatriates is assuming what was tax-efficient back home is the same in Portugal. UK ISAs, for example, are taxable for Portuguese residents.
Meanwhile, once you are resident here, you gain access to opportunities to enjoy extremely favourable tax treatment on capital investments.
When relocating, taking a fresh look at your financial planning is crucial to make sure you are suitably diversified and everything is set up in the best way for your new circumstances. Talk to a locally-based adviser who understands the Portuguese tax regime – including its interaction with UK rules – and who can recommend tax-efficient solutions for your assets and wealth.
The right currency mix for you
Once you are living in Portugal and your expenses are in euros, keeping savings and investments in sterling or another currency makes your income vulnerable to exchange rate fluctuations. Look for structures that let you diversify by holding investments in multiple currencies, with flexibility to choose the currency of your withdrawals and convert when rates are favourable.
Buying and selling property
Another important issue to consider early is the tax implications of buying and selling property. When is the best time to sell your current property, in the UK or elsewhere, or buy a Portuguese home to limit capital gains tax and stamp duty in both countries? Will you have to pay Portuguese ‘wealth tax’ on your new home? How can you make the most of available reliefs and allowances? Understanding the answers could save thousands in unnecessary taxes, so take care to establish your best approach.
What to do with your pensions
If you are planning to retire in Portugal, make sure you fully understand your pension options and the tax implications before making any decisions.
If you have a non-government UK pension, it is possible to benefit from a flat 10% tax rate on pension income and withdrawals for ten years as a non-habitual resident. However, make sure you understand the rules as there are limitations that could inadvertently bring you into Portuguese taxation range.
Many British expatriates benefit from transferring UK pension funds into a Qualifying Recognised Overseas Pension Scheme (QROPS), or by reinvesting a lump sum in more tax-efficient arrangements for Portugal. Ultimately, there is no one-size-fits-all solution for a secure retirement, so regulated, personalised pensions advice is essential.
How your legacy will be passed on
Portuguese succession law and tax can disadvantage certain heirs if you are not suitably prepared. Unless you take action, ‘forced heirship’ rules could automatically pass a proportion of your worldwide estate to your immediate family, whatever your intentions. Spouses and ascendants/descendants are exempt from the Portuguese version of inheritance tax (‘stamp duty’), but other heirs – including stepchildren and siblings – could be liable for 10% when receiving Portuguese assets.
If you are a UK national, you could remain UK-domiciled – even after living abroad for years – putting your estate in the firing line for 40% UK inheritance tax. Similar liabilities can apply for other nationalities. Good estate planning can ensure your legacy goes to your chosen heirs without attracting more tax than necessary.
With early, careful planning you can significantly reduce your tax bill and have the financial peace of mind to relax and fully enjoy your new life in Portugal. However, cross-border taxation is complicated, so take personalised, professional guidance – ideally before you move – for the best results.
Contact us to talk to discuss your Portugal plans