For UK nationals looking to live abroad, there are many good reasons to choose Portugal, and one of them is its beneficial tax regime. The Non-Habitual Resident (NHR) scheme was established to encourage wealthy people to move to Portugal.
For UK nationals looking to live abroad, there are many good reasons to choose Portugal, and one of them is its beneficial tax regime.
In 2009, Portugal introduced the non-habitual resident (NHR) scheme to encourage wealthy people to move to Portugal. Recent arrivals and those not yet resident can benefit from it quite significantly – and this includes retirees.
The non-habitual resident regime provides favourable tax treatment for the first 10 years of residence. To register for it:
- you must not have been tax resident in Portugal for any of the previous five tax (calendar) years
- you must meet the criteria to be tax resident here in the year you apply, as well as every other year for the 10-year period; this means you must spend more than 183 days a year in Portugal, or have a habitual residence here
- your application has to be approved by the Portuguese tax authorities.
Working in Portugal
Under regime, if your employment or self-employment income comes from a “high value-added activity of a scientific, artistic or technical nature”, you will be taxed at 20% – compared to Portugal’s current top rate of income tax of 48% (56.5% including solidarity tax and surtax).
The list of high value-added roles is subject to change but currently includes: architects, engineers and similar technicians; fine artists, actors and musicians; auditors; doctors and dentists; professors; psychologists; liberal professions, technicians and similar; investors, and directors and managers.
In general, if you are NHR registered, income from a foreign source like dividends, interest, rental income and capital gains (not including on UK shares) will be exempt from tax here provided:
- it may be taxed in the source state under double taxation treaty rules, or
- it may be taxed in the source state under the terms of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, if no tax treaty exists, and is not regarded as arising in Portugal.
However, foreign source income may be taken into account to calculate tax if you have income or gains taxable in Portugal.
Under the non-habitual resident regime, UK pension income is exempt from tax in Portugal if it is either taxed in the UK under the terms of the UK/Portugal tax treaty, or it is not regarded as Portuguese-source under domestic legislation. In practice, pension income may be exempt from tax in both Portugal and the UK.
The new UK ‘pension freedom’ means you can withdraw as much of your defined contribution funds as you wish, including the whole amount as a lump sum. So, under the NHR regime, with the tax treaty, you could potentially withdraw your entire UK pension in the first 10 years without paying any tax in the UK or Portugal.
Selling UK property
If you are eligible for the non-habitual resident regime, it may be best to wait until you are resident in Portugal before you sell any UK property you own. The UK/Portugal treaty says that immovable property gains are taxed in the country where the property is located. Since the UK has taxation rights, the gains are exempt in Portugal under the non-habitual resident regime.
The UK taxes gains made on residential property owned by non-residents, but only those made from 6th April 2015. There is an annual tax-free allowance of £11,100 (for 2015/16).
Tax exemption does not apply to income from blacklisted tax havens.
Tax advantages outside of NHR
Even if you do not qualify for the non-habitual resident scheme, Portugal can still be tax-efficient.
There are compliant arrangements available in Portugal which provide attractive tax advantages for your investment capital. They can also provide estate planning benefits.
The UK imposes inheritance tax on UK domicile’s worldwide assets, but the Portuguese equivalent – “stamp duty” – only applies to assets in Portugal. Spouses and children are exempt and for everyone else the tax rate is only 10%. There is also no wealth tax in Portugal.
So you can make considerable tax savings, but everyone’s situation is different. You should take bespoke professional advice to make sure any arrangements are compliant and suitable for your circumstances and objectives.
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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.