Despite wide speculation about reform of Portugal’s highly generous non-habitual residency (NHR) tax regime, the Portuguese government announced their 2018 budget proposal this month without making any changes to the rules. But are the tax benefits currently available to Britons moving to Portugal – including the opportunity to lock in tax-free UK pension income – likely to last?
Speculation has been rife that the tax benefits of the highly favourable non-habitual residency (NHR) scheme could be watered down for expatriates settling in Portugal.
Confirming that a review of NHR is underway, last month the Portuguese government hinted at plans to start taxing foreign pensions for non-habitual residents in the future.
However, against expectations, NHR changes – which many thought would include a 5-10% pensions tax – did not feature in the recent Portuguese state budget proposal for 2018. While this is still yet to be approved by the rest of parliament on 28 November, it seems likely that the NHR regime will be unchanged – for now at least.
How does NHR work now?
People of any nationality can qualify for NHR if they have not been resident in Portugal within the last five Portuguese tax years.
As things stand, Britons who acquire non-habitual residency can receive most UK pension income or lump sums without attracting tax for their first ten years in Portugal. This is because NHR offers tax exemptions for many types of foreign-source income that is taxed or taxable in another country under the terms of a double tax treaty.
Because the UK-Portugal tax treaty gives Portugal the taxing rights on UK private pensions, company pensions and the UK State Pension, most UK pensions qualify. As a result, it is currently possible for Britons to withdraw UK pension funds (lump sums or income) completely tax-free during their first ten years in the country.
Rental income, certain capital gains, interest and dividends can also be exempt in Portugal, although UK tax may be due on the income. The key exceptions here are UK government pensions – including those from a local authority, the army, police, teaching and fire service – which always remain taxable in the UK.
Who would be affected by a change to the rules?
Any future changes to the NHR regime are likely to only apply to those acquiring NHR status after a certain date. So those who have already registered for NHR – or do so before any changes come into effect – should have benefits locked in to continue for the full ten years of their initial residency.
Why the speculation about change?
Not only would Portuguese coffers be boosted by extra taxation, the government is under immense pressure from other European countries to impose taxation on expatriate retirees.
Currently, many countries with double tax agreements with Portugal – including the UK –offer tax relief to nationals during their working lifetimes on pension contributions and growth. Revenue is expected to be recovered later through income tax paid on pension withdrawals during retirement. However, this is not the case for those who move to Portugal under NHR, who can access their pensions without paying tax in either country.
Last November, the Portuguese government bowed to pressure from Finland to allow taxation of Finnish pensioners with NHR status from 2019. With intense pressure coming now from Sweden and elsewhere, Portugal’s finance minister, Mário Centeno, has pledged to standardise taxation of foreign pensions to maintain “a good fiscal relationship” with other European countries.
Portugal still offers appeal for Brits
Even with a potential future tax of up to 10% on foreign pension income (still lower than many countries) – or for those who do not qualify for NHR – Portugal can be a very tax-efficient option for British expatriates.
Portuguese taxes are relatively low and there are opportunities for extremely favourable tax treatment on investments. Local inheritance tax (stamp duty) is also relatively benign – affecting Portuguese assets only at a fixed rate of 10% for indirect family members or non-related individuals. And while UK pension income outside the NHR regime attracts the usual scale of Portuguese income tax rates peaking at 48%, in some circumstances it is possible to receive up to 85% tax-free.
While Portugal does have a version of wealth tax, it only affects those whose ownership of Portuguese property is worth more than the €600,000 individual allowance threshold. Married couples and civil partners can therefore enjoy a combined allowance of €1.2 million before the tax is due. Rates are relatively low at 0.4% for properties held by companies (with no allowance), 0.7% for individuals and 1% for those whose share in Portuguese property exceeds €1 million.
But for most people, settling in Portugal is about more than financial benefits. For those already living here, it will be no surprise that Portugal is ranked the best country in the world for expatriates’ quality of life (InterNations ‘Expat Insider’ 2017).
For anyone thinking about moving to Portugal, it is a good idea to do so sooner rather than later under existing rules to secure current benefits. Acting pre-Brexit is also advisable – the UK’s new 25% tax on QROPS transfers outside the EU/EEA could extend to transfers within the bloc once Britain sheds its EU obligations, leaving limited time to make tax-free pension transfers.
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.