By Dan Henderson -1st September 2022
Moving to Portugal proves very rewarding for many people, and for a whole variety of reasons. While quality of life is the most important, Portugal can offer tax benefits too.
To make the most of your move, do not underestimate the importance of early tax and financial planning. Even if you have been living here a while, you should regularly review your arrangements to make sure they are up-to-date.
Once you become resident here, you are liable to Portuguese tax on worldwide income and certain capital gains, so be prepared for this.
You are usually considered tax resident after 183 days in Portugal, but it can be earlier – potentially the day you arrive – if you relocate with the intention of making it your home. Also, be mindful of the residency rules in your country of origin.
If you plan ahead and have flexibility, it is possible to time your change of residency to minimise tax liabilities in both countries.
New residents can enjoy significant tax benefits for their first 10 years through Portugal’s ‘non-habitual residence’ (NHR) regime. To qualify, you cannot have been resident within the last five tax years and should apply through the local tax office soon after arrival.
Besides offering a fixed 20% income tax rate to those employed in ‘high value-added’ professions, NHR lets you receive some foreign income tax-free or, in the case of pensions, at a reduced rate. You could also pay no Portuguese tax on gains from UK property.
Even outside of NHR, Portugal can be highly tax-efficient. While income is taxable at progressive income tax rates up to 48%, there are often ways to lower taxes on your investment and pension income, so explore your options.
A potentially costly mistake is assuming what was tax-efficient back home is the same in Portugal. UK ISAs, for example, are taxable for Portuguese residents.
Meanwhile, once you are resident here, you gain access to opportunities to enjoy favourable tax treatment on capital investments.
When relocating, taking a fresh look at your financial planning is crucial to ensure you are suitably diversified and everything is set up in the best way for your new circumstances. Talk to a locally-based adviser who can recommend tax-efficient solutions for your assets and wealth.
Once you are living in Portugal and spending euros, keeping savings and investments in sterling makes your income vulnerable to exchange rate fluctuations. Look for structures that let you diversify by holding investments in multiple currencies, with flexibility to choose the currency of your withdrawals and convert when rates are favourable.
Another issue to consider early is the tax implications of buying and selling property. When is the best time to sell your current property or buy a Portuguese home to limit capital gains tax and stamp duty? Will you have to pay Portuguese ‘wealth tax’ on your new home? How can you make the most of available reliefs and allowances? Understanding the answers could save thousands in unnecessary taxes.
If you are planning to retire in Portugal, you should fully understand your pension options and the tax implications before making any decisions.
Many British expatriates benefit from transferring UK pension funds into a Qualifying Recognised Overseas Pension Scheme (QROPS), or by reinvesting a lump sum in more tax-efficient arrangements for Portugal. Ultimately, there is no one-size-fits-all solution for a secure retirement, so regulated, personalised pensions advice is essential.
Portuguese succession law and tax can disadvantage certain heirs if you are not suitably prepared. Unless you take action, ‘forced heirship’ rules could automatically pass a proportion of your worldwide estate to your immediate family, whatever your intentions.
Spouses and ascendants/descendants are exempt from the Portuguese version of inheritance tax, but other heirs – including stepchildren and siblings – could be liable for 10% when receiving Portuguese assets.
UK nationals could remain UK-domiciled – even after living abroad for years – putting your estate in the firing line for 40% UK inheritance tax. Good estate planning can ensure your legacy goes to your chosen heirs without attracting more tax than necessary.
With early, careful planning you can significantly reduce your tax bill and have the financial peace of mind to relax and fully enjoy your new life in Portugal. Cross-border taxation is complicated, so take personalised, professional guidance for the best results.