For many expatriates, owning a place on the coast or in the sun-drenched countryside is part of their dream retirement in Portugal. Knowing the tax position on disposal is not normally something that is front and centre of one’s mind at the point of acquiring the property, but it is important to look beyond that exciting moment, and understand all the tax implications.
It is also quite common to be offered the shares in an offshore company which owns the Portuguese property, rather than the actual property itself. This is an area which has undergone considerable legislative extension in the past ten years or so.
Capital gains tax in Portugal
Residents of Portugal pay tax on their worldwide capital gains, unless they are resident in Portugal under the favourable ‘non-habitual residence’ (NHR) regime, in which case, only certain gains are taxable in Portugal.
Under NHR, a gain is exempt in Portugal if it may be taxed (under tax treaty rules) in the country of source. In relation to disposals of UK real estate, the UK/Portugal treaty says that immovable property gains may be taxed in the country where the property is located. As the UK has taxation rights, the gains are exempt in Portugal under the NHR regime.
Capital gains tax applies when selling any Portuguese property acquired after 1988.
CGT for Portuguese residents
For residents, real estate gains are added to other annual income and taxed at the scale rates between 14.5% and 48%, but only 50% of the gain is taxable and inflation relief applies after two years of ownership.
Portugal has its own form of main home relief, and residents should not face Portuguese capital gains tax, as long as they use the proceeds from selling the main home (net of any mortgage repayments) to buy another home within Portugal or the EU/EEA, within 36 months of the date of disposal. While this currently means that Britons selling a Portuguese home to reinvest in a UK property should be exempt, this could well change post-Brexit.
If the plan was to downsize, there could be the potential for a tax liability in Portugal. Fortunately, for the retired Briton, a new main residence relief introduced at the start of this year can be combined with reinvesting some of the sale proceeds in a new main home.
Now, if you are either retired or aged over 65, you can receive an exemption if you reinvest the same property gains in an eligible insurance contract or pension fund within six months of sale.
The insurance contract route could be particularly beneficial if the individual is returning to the UK, once the UK has left the EU/EEA and reinvesting the proceeds into a new main home in the UK would not benefit from reinvestment relief.
CGT for non-residents
For non-Portuguese residents, 28% is payable on all capital gains. While an EU citizen, Britons can opt to be taxed as a Portuguese resident instead, but must declare worldwide income to calculate the applicable tax rate. Those looking at doing this should take care, however, as this may not be the most tax-efficient approach.
Properties within a corporate structure
Before 2018, a non-Portuguese company or trust owning property in Portugal was considered ‘opaque’ in the sense that it and its non-resident shareholders were outside the scope of Portuguese taxation.
Now, where a non-resident company’s value consists of 50% or more in Portuguese real estate, the gain on the transfer of shares may be subject to a new Portuguese corporation tax of 25%.
The charge only applies where the double tax treaty between Portugal and the company’s country of incorporation gives Portugal the right to tax the transaction. This will be the case, for example, for some types of USA-owned companies, but not for those based in the UK or Luxembourg (although corporation tax is instead payable in those countries).
If the property is owned by an offshore company, depending on where it is based, it may also be affected by recent ‘blacklist’ rules that redefine how the Portuguese authorities recognise tax havens.
If the authorities see that tax rates levied in a jurisdiction are less than 60% of the equivalent Portuguese taxation, they may consider it blacklisted and impose taxation of up to 35% on residents holding assets there.
Portuguese wealth tax
The annual Adicional Imposto Municipal Sobre Imóveis (AIMI) affects those with a share in Portuguese property worth over €600,000, regardless of residency. Rates are 0.4% for properties held by companies, 0.7% for individuals and 1% where combined property value goes over €1 million. Since 1 January 2019, an additional rate of 1.5% applies on properties over €2 million.
The €600,000 allowance is a per person deduction, taken from the value of all Portuguese properties. This means couples with joint ownership only face AIMI if properties exceed €1.2 million, and then only on the value above this amount.
Those not eligible for the allowance pay AIMI on the full property value. However, the tax authorities calculate property value using the Valor Patrimonial Tributário (VPT), which is usually lower than the actual market value.
Other tax considerations
If someone dies owning Portuguese property or gifts it during their lifetime, recipients other than their spouse, children or parents will face 10% Portuguese stamp duty, wherever they live. Additionally, UK nationals may be considered UK-domiciled and therefore liable for UK inheritance tax, even if they are Portuguese resident.
Renovating or extending a Portuguese property could prompt revaluation by the tax authorities. While this could potentially lead to higher AIMI charges, bringing the VPT closer to market value could provide capital gains tax benefits when selling the property.
UK nationals living in Portugal, or just owning property there, need to keep up with their tax obligations in both Portugal and Britain. As it can be difficult to get cross-border tax planning right, it is sensible to take personalised, professional advice to limit their tax exposure.
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; individuals should seek personalised advice.