Thinking about moving to Portugal for a lifestyle change or to soak up some sunshine in your retirement years? Did you know you could also enjoy years of generous tax breaks just by moving here?
Portugal’s ‘non-habitual resident’ (NHR) scheme offers new residents special tax benefits for their first ten years in the country. Besides offering a low income tax rate if you are employed here, the NHR scheme allows you to receive foreign income – like pensions – tax-free. You could also pay no Portuguese tax on gains you make from UK property.
Being a tax regime, it will not be affected by the recent ‘Brexit’ vote to leave the EU, so Britons can continue to both apply and benefit.
Sound tempting? It could become a reality if you:
Although Brexit may eventually have an effect on residency rules, double tax treaties such as the one between the UK and Portugal are independent of the EU. As a result, the existing tax treatment outlined here should continue to apply.
Tax breaks if you work in Portugal
If you are in Portuguese employment and a non-habitual resident, you attract a flat 20% income taxrate if you work in one of the pre-defined ‘high value-added’ scientific, artistic or technical professions. This offers a significant reduction on the usual scale rates, which go up to 48%.
Tax-free foreign income
Generally, if you are a non-habitual resident, most foreign-source income and gains are tax-free for the first ten years. This includes pensions, rental income, capital gains on real estate (but not shares), interest, dividends or any non-Portuguese employment income.
This applies only if the income may be taxed (it does not have to be actually taxed) in the country of origin, for example, under the double tax treaty between the UK and Portugal.
Take UK dividends; they are not taxed in Portugal because under the UK/Portugal treaty they are taxable in Britain. In practice, however, under the disregarded income rules they may not actually be taxed in the UK. In this case, and also where the double tax treaty grants taxation rights to the country of residence only, you could end up paying no tax – in either country – on UK income.
Note, however, that such foreign income may be counted when calculating your overall tax bill for other taxable income or gains in Portugal.
Tax-free pension income
Your UK source pension income is tax-free in the UK under the double tax treaty (unless it is a government service pension) and tax-free in Portugal if you are a non-habitual resident. This applies even if you take your whole pension fund as a lump sum under the new UK pension freedoms. After ten years, your pension income will be taxed at the scale rates.
Tax exemption on UK property
The UK/Portugal treaty determines that gains on real estate may be taxed in the country where the property is located. So as a non-habitual resident, gains on UK property would not attract capital gains tax in Portugal. You would, however, be taxable in the UK on the gain accruing since April 2015.
Other tax benefits in Portugal
Even if you do not qualify for non-habitual residence, Portugal offers some very attractive tax benefits for UK expatriates.
The Portuguese version of wealth tax is much less punitive than in Spain or France. The inheritance tax regime is also more gentle – it only applies to Portuguese assets, spouses and children are exempt and others pay just 10%. Portugal also offers opportunities to enjoy extremely favourable tax treatment on your capital investments and pension income.
If you do qualify for non-habitual residence, you may benefit from combining these structures with the regime rules. For example, it might suit you to sell a UK property or dip into your pension without paying tax in Portugal and reinvest elsewhere to make the most of the advantageous tax-efficient opportunities available in Portugal. Ultimately, the best course of action for you will depend on your individual circumstances and aims.
While the non-habitual resident regime can offer significant advantages, like any tax regime it is also highly complex. You should seek professional, personalised advice – covering both tax and financial planning for Portugal – to provide you with tailored recommendations to meet your objectives.
The 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 should take personalised advice.