Portugal – Top tax destination of choice
If you’re a UK national living in or thinking about moving to Portugal, it’s important to review your financial planning. This should look at tax efficiency and how your estate planning, investment strategies and pensions can work most favourably for you and your new life in Portugal.
British people moving to Portugal can potentially receive income such as UK pensions and UK dividends tax free for ten years under a special arrangements by the Portuguese government.
A transfer abroad is likely to be inspired by a shift of lifestyle or to soak up some sun in retirement, but Portugal is a favoured destination for us as tax advisors that provides broader appeal, as new residents have the potential via the Non-Habitual Residency Tax Regime (‘NHR’) to experience a decade of generous tax cuts.
‘NHR’ was introduced in 2009 by the Portuguese government to attract wealthy individuals and successful businesses to the country by offering what is essentially a tax holiday during your first ten years living there:
- If employed in Portugal, non-habitual residents can benefit from a flat 20% rate of income tax on their earnings, which represents a reduction on both UK’s (45%) and Portugal’s (48%) top income tax rates.
- For entrepreneurs and retirees the NHR offers the opportunity to receive foreign income completely tax free.
Once you are resident in Portugal, you could potentially pay:
- Income tax of up to 48%
- A solidarity tax of 2.5% or 5% for higher incomes
- 28% on interest income
- Tax on capital gains when selling property and investments
- Annual wealth tax of up to 1% on property interests worth over 600,000 Euros.
Even if you are not resident, you could be liable for Portuguese taxes, for example if you own or sell property in Portugal.
Foreign income in this context means foreign to Portugal, which offers British expats some interesting opportunities, including:
- UK pensions-tax Portugal’s deal with Portugal and the United Kingdom grants Portugal exclusive taxation rights to most UK pensions (including private and industrial pensions but excluding government benefits funded for, for instance, local councils, armed forces, NHS and the like), but most benefits would not be taxable under the NHR, meaning you will benefit from 10 years of tax-free pension payments;
- Dividends from UK companies-such avoid tax under the NHR in Portugal as they are taxable in the UK, but special “disregarded income” laws in effect will remove UK tax responsibility for those residents abroad. As a result, in any country, you could end up paying no tax on dividends earned by UK firms, which could be of special interest to entrepreneurs who have developed cash-rich enterprises and who would now like to enjoy their riches in a tax-efficient manner, or who would like to provide tax-efficient provision for their children and future generations.
If you are currently tax resident in the UK, on your worldwide wages and gains, you can usually pay tax in the UK. You not only have to become a Portuguese tax resident in order to benefit from the NHR, but it is also appropriate to cease being a UK tax resident. UK tax residency is determined by the Statutory Residence Exam and a key element in the determination of your UK tax residence status is the amount of time you spend in the UK.
This is also a big problem for persons planning a relocation abroad, but spending a fair amount of time visiting friends and relatives in the UK does not in itself suggest that you would be considered a UK tax resident.
Each individual case must be assessed on its specific circumstances, but it is often possible to make annual visits to the UK of up to 90 days without becoming UK tax resident. Indeed, in some circumstances you can spend nearly half the year in the UK and still not become UK resident.
When thinking about tax motivated emigration, like all tax planning, the devil is in the detail. The NHR offers the opportunity to relocate to Portugal to benefit from ten years of tax-free income, but it is crucial to fully understand your position in the UK and in Portugal before buying your flight tickets.
One key point to keep in mind, particularly for the entrepreneur looking to benefit from the tax exemption on dividend income or to sell assets in a capital gains tax efficient fashion, is that you need to be confident of remaining tax resident outside the UK for at least five years. If this absence from the UK is not achieved, there can be a nasty sting in the tail on return, whereby HMRC can seek to tax certain income and gains arising during your period of “temporary” non-residence regardless as to whether you have been party to the NHR or any other similar regime during your absence.
Estate planning and inheritance tax
The Portuguese equivalent of inheritance tax is stamp duty and is only payable on assets based in Portugal, such as property and vehicles. The rate is 10% for everyone, apart from direct family and spouses who’ll pay no tax at all on inheritances.
Many British expatriates in Portugal may not be aware that they could also face UK inheritance tax, which is determined by domicile rather than residence.
Portugal’s succession law imposes forced heirship. This means that your direct family could automatically inherit a pre-defined proportion of your estate, regardless of whether that’s your intention. However, there are ways to override this rule.
Non-habitual residency: Tax-free opportunities for new residents
Portugal’s ‘non-habitual residents’ (NHR) scheme gives special tax benefits to new residents for their first ten years in the country. It also offers a lower income tax rate of 20% if you’re employed in Portugal in a ‘high value’ activity and allows you to receive some foreign income tax-free. You could also pay no capital gains tax in Portugal when selling UK property.
Even if you do not qualify for non-habitual residence, Portugal offers some very attractive tax benefits for UK expatriates.
UK pensions in Portugal
Expatriates retiring to Portugal can enjoy significant tax benefits on UK pension income.
Through the UK/Portugal tax agreement, most UK pensions are taxable only in Portugal. Under non-habitual residency (NHR), UK pensions are taxable at 10% for the first ten years in the country. For other residents, British pensions are taxable at the Portuguese income tax rates up to 48%.
Many expatriates prefer to transfer their UK pension to a Qualifying Recognised Overseas Pension Scheme (QROPS) to unlock tax-compliant opportunities in Portugal.
At present, the Portuguese Socialists are pressing for a flat rate 10% tax rate to be introduced on foreign income received by NHRs and, although unwelcome, there would still be significant tax savings for many.