Portugal has long been a firm favourite with Britons looking to buy a holiday home or move abroad. But alongside its warmer climate and stunning scenery, its best-kept secret is its preferential tax regime for new, long-term residents.
Many UK expats move overseas without thoroughly looking into the tax options in their new countries. If you want to live in Portugal, start with the Non-Habitual Regime (NHR) for new tax residents.
The Portuguese government introduced the NHR scheme in 2009 to encourage individuals and families to move to the country. It provides beneficial tax treatment for the first ten years of residence, and is open to those in employment and retirees.
Qualification for the scheme is restricted to those who have not been tax residents in Portugal for any of the previous five tax years. There are no other major requirements.
Any income received from a UK pension is exempt from Portuguese tax, provided it is either:
- Taxed in another country under the terms of the tax treaty, or
- Is not regarded as Portuguese source income under Portugal’s domestic legislation
In practice, this means that UK pension income can be excluded from taxation in both Portugal and the UK. This is certainly the case for private pensions, UK company pensions and the UK State Pension (UK Government pensions, such as for teachers and firefighters, remain taxable in the UK).
This becomes particularly appealing when you factor in the UK’s new pension freedom rules, which allow you to take lump sums from your pension fund, rather than converting to an annuity.
NHR can also be attractive for other sources of income, like UK dividends, which will be tax-free in Portugal, as the UK/Portugal treaty provides that they may be taxed in the UK, even though, in practice, the UK’s disregarded income rules for non-residents mean it is unlikely to be taxed in the UK.
If you have other savings and will have surplus capital from the sale of your UK home, there are also other things you can do for tax efficiency in Portugal.
Most British expats in Portugal with capital to invest utilise an investment wrapper, known as an offshore life assurance policy.
This defers tax on any underlying investment income (such as interest, dividends and gains) until a withdrawal is made from the policy. Even then, the taxable element is not all the profit accrued, but the proportion of profit in the withdrawal, relative to the whole value.
As an example, say a policy started with €100 and has increased in value to €110, then a withdrawal of €11 is made, the profit compared to the whole value is 1/11th, so only €1 of the €11 is taxable. In addition, the rate of tax drops after five years, so only 60% of the profit is taxable, falling to just 20% after eight years.
For the rich in Europe, Wealth Tax can be a considerable annual burden.
In Spain and France, it is calculated on worldwide assets, and at rates of 1.5% and 2.5% respectively (though regional variations in Spain could mean a top rate of 3.2%).
Although Portugal recently introduced its own version, it cleverly set it at a maximum rate of 0.3% and only on Portuguese property valued at over €600,000. The allowance is also per individual, so a married or civil couple would only face Wealth Tax on jointly-owned properties worth over €1.2m.
If you’re concerned about potential inheritance tax on your estate, and how the UK and Portuguese succession rules interact, you’ll be pleased to learn that the Portuguese regime is relatively benign.
It only applies to Portuguese assets and the tax rate is 10%. Furthermore, spousal and child beneficiaries are exempt.
Most of Europe has a succession regime based on the Napoleonic code of forced heirship, meaning that children and spouses receive relatively fixed shares of an estate.
Portugal allows non-Portuguese nationals to elect to apply the succession regime of their nationality, by requesting it in their will.
This is particularly important to UK nationals living in Portugal, as new EU succession rules, which effectively allow a similar scenario to apply, will fall away when the UK leaves the EU.
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