As a regular feature, we will look at some of Europe’s most popular retirement spots among Brits. This time, it is Portugal.
Many UK expatriates move overseas without having any real understanding of the tax system they are going to be exposing themselves to. But we have noted a significant change in the knowledge and awareness of UK nationals who are choosing Portugal. This might be because Portugal can be seen as somewhat of a tax haven, particularly for those retiring abroad.
The non-habitual residents (NHR) regime
In 2009, the Portuguese government introduced the ‘non-habitual residence’ regime to encourage high value industries and individuals to relocate to Portugal. Very soon it became clear that, as long as you satisfied the qualifying criteria, this regime could benefit almost all individuals and families moving to Portugal.
NHR provides beneficial tax treatment for the first ten years of residence and is open to those in employment, as well as retirees.
Qualification is restricted to those who have not been tax resident in Portugal for any of the previous five tax years. There are a few other major requirements, and application is via the Portuguese tax authorities.
Being a tax regime under the jurisdiction of the Portuguese government, not the EU, NHR will not be affected by Brexit, so Britons can continue to both apply and benefit.
NHR and UK pensions
For those moving to Portugal in later life, this tax regime has particular interest. Any income received from a UK pension is exempt from Portuguese tax provided it is:
- Taxable in another country under the terms of a tax treaty
- Not regarded as Portuguese-source income under Portugal’s domestic legislation.
In practice, this means most UK pensions would qualify and be exempt from Portuguese taxation.
The UK/Portugal double tax treaty gives Portugal the taxing rights on private pensions (such as SIPPs), UK company pensions, and the UK State Pension. This means there should also be no UK tax liability, although any UK tax deducted can be recovered. However, UK government pensions – Including those from a local authority, the army, police, teaching, fire service and some NHS departments – always remain taxable in the UK.
Under NHR, therefore, it is possible to receive a UK pension without attracting any tax for ten years. Once this period has passed, any pension receipt would be taxable in Portugal at the usual income tax scales rates as part of any annual return to the Portuguese tax authorities.
The benefits of NHR took on additional significance when the UK pension freedoms of 2015 enabled scheme members to take a lump sum from their pension fund instead of just converting the fund to an annuity. Now, it is possible to withdraw a UK pension fund in its entirety, without paying tax in Portugal or the UK during the initial ten-year period.
NHR and UK dividends
NHR can also be advantageous for other sources of income, like UK dividends, which will be tax-free in Portugal for non-habitual residents. Although the UK/Portugal treaty provides they may be taxed in the UK, the UK ‘disregarded income’ rules for non-residents should mean it is unlikely that any tax liability will arise if this is your only UK source of income.
Tax-efficient investing in Portugal
Even for those who do not qualify for non-habitual residence, Portugal offers some very attractive tax benefits.
Most UK expatriates living in Portugal with capital to invest use a tax-efficient investment vehicle similar to an offshore life assurance policy or offshore bond. This form of life policy acts as an investment wrapper to a conventional investment portfolio.
The rules differ from the UK to Portugal, but the basics remain the same – it defers tax on any underlying investment income (interest, dividends and gains), until a withdrawal is made from the policy.
In Portugal, however, there is no 5% allowance or similar, but the taxable element is not the full withdrawal. Instead, only the gain element in the withdrawal relative to the whole value is liable.
This is best explained through an example: say a policy is started with €100 and increases in value to €110. A withdrawal of €11 is made. The profit compared to the whole value is 10:110, or 1/11th, so only €1 of the €11 is taxable.
The effective rate of tax also drops over time – after five years, only 80% of the profit becomes taxable; after eight years, the liable proportion falls to just 40%.
Portugal’s ‘wealth tax’
For the wealthy in Spain and France, wealth tax can be a considerable annual burden. In both these countries it is calculated on a worldwide basis, and at rates of up to 2.5% and 1.5% respectively (though regional variations in Spain could mean a top rate of up to 3.75%).
While Portugal introduced its own version this year, it is essentially an additional ‘council tax’ that only affects those owning Portuguese property worth over €600,000. Rates are set at 0.4% for properties held by companies, 0.7% for individuals and 1% for those with interest in property exceeding €1 million.
However, there is a €600,000 allowance per individual, so a married or civil couple would only face wealth tax on jointly-owned properties valued at over €1.2 million. As such, it is not expected this will lead to an exodus of the wealthy, as it has done in Spain and France.
Portuguese succession taxes and interaction with the UK
The Portuguese inheritance tax regime – called stamp duty – is relatively benign. It only applies to Portuguese assets at a fixed rate of only 10%, and spousal and child beneficiaries are exempt.
Most of mainland Europe has a succession regime based around the Napoleonic code of ‘forced heirship’, which means direct children and spouses automatically receive relatively fixed shares of an estate. However, a recent EU regulation – Brussels IV – allows non-Portuguese nationals to override this by electing to apply the succession regime of their nationality in their will, although doing so may invite unexpected tax implications.
As Brussels IV is available to all foreign nationals in an EU country – regardless of nationality – this option will remain for Britons in Portugal post-Brexit.
Overall, Portugal offers much more than just sun, sea and golf. With a relatively simple tax system offering many benefits for the new arrival, it is particularly attractive to UK retirees – and there is no reason why Brexit should change that.
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.