Tax Planning in Portugal

In planning your move to Portugal, it is important to be aware of the different tax treatment there compared with the UK and have an advisor you can turn to who understands the differences, and the interaction (via Double Tax Treaties), between the two regimes.

In Portugal, you are tax resident if you spend more than 183 days in Portugal in a 12-month period or if you make Portugal your ‘habitual residence’ which is simply making it your ‘home’.

Portugal’s sliding scale of income tax ranges from 14.5% on the first €7,112 of income, rising through seven tax bands to 48% on income exceeding €80,882.  These income tax rates have been unchanged since 2018.

Portuguese tax on investment income

The tax rates are different for interest and investment income, such as shares, securities and bonds, which attract a flat rate of 28%. However, if you are a Portuguese resident, you have the option to pay tax at the scale rates instead if that works out cheaper for you.

Capital gains tax

If you are a Portuguese resident and sell property or assets – anywhere in the world – only 50% of the gain is taxable with relief for inflation after two years of ownership. Crucially, however, you won’t be taxed if you sell a main home and reinvest the proceeds to buy a new main home in Portugal or elsewhere in the EU/EEA or a country where there is an exchange of information clause with Portugal regarding tax matters. However, to qualify, you must do this within 36 months after the sale (or 24 months before) and also live in the property within six months of the three-year deadline.

Retirees or residents aged over 65 can avoid Portuguese capital gains tax when reinvesting into an eligible insurance contract or pension fund – great news for downsizers, though you must do this within six months of sale to qualify.

Meanwhile, non-residents face a flat 28% charge on 100% of any gain from Portuguese assets.

Non-Habitual Residence (NHR) regime

Portugal’s NHR regime continues to offer new arrivals highly attractive tax benefits for their first ten years of tax residence. If you have recently moved to Portugal and have not resided there in the previous five years, you can apply at your local tax office to unlock significant benefits.  

Under NHR, most foreign income, certain capital gains, interest and dividends can be taken tax-free in Portugal.

Since 2020, NHR includes a flat 10% tax on foreign pension income, withdrawals and drawdowns (including lump sums). This can be highly beneficial for those with UK Self-Invested Personal Pensions (SIPPs) or company pension schemes, in respect of an annuity over the ten-year period, or alternatively if your choice was to take the whole fund as drawdown.

There are also other tax efficient structures in Portugal, which can ensure the tax you pay is minimised far beyond the end of the initial ten-year period.

Wealth tax

Portugal’s Adicional Imposto Municipal Sobre Imóveis (AIMI) continues to apply a wealth tax of sorts to high-value Portuguese property, regardless of where the owner is resident. You are only liable if your stake in Portuguese properties is over €600,000, and then only on the value above that. So, if, for example, you and your partner jointly own a Portuguese home, the property will only attract AIMI if it is valued over €1.2 million. Rates are 0.7% for individuals, 0.4% for companies, and 1% for properties over €1 million (€2m for couples). 

Tax planning for Portugal

While on the surface the Portuguese tax system may appear quite benign, it is a significantly different system to the UK.

As an example, the very attractive NHR regime must be applied for within a certain timeframe or the benefits are lost.

In addition, it is widely quoted that Portugal does not have an inheritance or succession tax, but it does have what is colloquially called ‘stamp duty’ which is charged at 10% on Portuguese assets – mostly real estate – passed on as an inheritance or lifetime gift, regardless of where the donor or beneficiary is resident.

Whilst spouses, children and parents are exempt from this tax, partners who are neither married nor in a civil partnership, step-parents and step-children will all be potentially liable.

There is a lot to take in and be aware of and these are really only examples. Good planning can ensure you minimise the tax that impacts you and it helps to do so with specialists in this area. 

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; individuals should seek personalised advice.