Many people fall in love with Portugal and consider moving there. There are, however, some tax and financial essentials you need to be aware of and plan for if you are to get the best out of living in Portugal.

It is also useful advice for those who have recently moved over, or even those who have been here a while.

The starting point for living in Portugal is to understand how you become resident for tax purposes. Portuguese tax is levied according to de facto (actual physical) residence. Tax residency is not just about day counting. Besides the ‘183 day rule’, if you have a “permanent home” available in Portugal as of 31st December, you may be deemed to be resident for tax purposes.

Portugal now splits its tax year for residency purposes in the year of arrival and departure. This means that you are considered Portuguese tax resident from the day that you move there on a permanent basis.

British nationals also need to understand how the UK tax residency rules – the Statutory Residence Test – could continue to apply to you when moving to Portugal, and how the double tax treaty would determine where you pay tax if necessary.

When you become resident here, you are liable to Portuguese tax on worldwide income and, to some degree, on capital gains. You are also liable for other ancillary taxes such as property rental tax, tax on the transfer of real estate, stamp duty and vehicle sales tax.

The top rate of income tax is currently 48%. There is currently also an additional “solidarity tax” of 2.5% and 5% for incomes over €80,000 and €250,000 respectively. A further surtax should be abolished next year.

Investment income, including bank interest, is taxed at 28%. If the investment assets are in a jurisdiction on the Portuguese tax haven blacklist – including the Channel Islands and Isle of Man – the rate increases to 35%.

You need a thorough understanding of the Portuguese tax system and how it applies to you when living in Portugal. Only then can you establish what steps you can take to lower your tax liabilities. Because there is the good news – there are often ways to lower taxes on your investment and pension income.

Portugal offers a special ‘Non Habitual Resident’ regime for new residents, which provides beneficial tax treatment for ten years. There is a special tax rate of 20% applicable to employment income derived from certain ‘high added value’ activities, and a potential tax exemption for most foreign-source income, provided certain conditions are met. Take specialist, personalised advice to see how this would work for you.

Tax planning is not an area for DIY financial planning, you do need specialist guidance. Getting it wrong could be costly.

Inheritance tax (“stamp duty”) in Portugal is much less taxing than UK inheritance tax. Spouses and children are exempt, and the rate is just 10%. However, if you are UK domicile – a much more permanent concept than residence - your worldwide estate remains subject to UK inheritance tax even if you have lived in Portugal for several years, so you should plan to reduce this liability for your heirs.

Another important tax issue to consider early when retiring to Portugal is the tax implications of buying and selling property. When is the best time to sell your UK property? When is the best time to buy in Portugal? You could end up paying tax that could have been avoided, so look into this carefully.

Moving on to pensions, the UK pension reform in April 2015 provides you with more options, but you need to consider the tax implications of moving to Portugal. Weigh up all the options and how they work for you. There may be opportunities for Portuguese residents, particularly those eligible for the Non Habitual Resident regime. If you have not yet started drawing your pension, seek advice before you do.

Last but certainly not least, you need to review your savings and investments, to ensure they are structured in the most suitable way for your new circumstances and objectives. You want them to be structured in the most tax efficient way for Portugal, as well as to meet your estate planning wishes. So overall, it may be time for some restructuring.

The sooner you carry out your tax and wealth management planning, the sooner you can get on with enjoying your new life in Portugal.

Any questions? Ask our financial advisers for help.

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 is advised to seek personalised advice.