You may consider moving to Portugal for a healthier, more relaxed lifestyle, but it also offers much wider appeal, giving new residents the opportunity to enjoy a decade of generous tax breaks through the non-habitual residence (NHR) regime.
What is non-habitual residency?
‘Non habitual’ simply means that this regime is open to people who have not lived in Portugal in recent years.
The NHR was introduced by the Portuguese government in 2009 to attract ‘high value’ foreign residents to live here and offers reduced tax rates and some tax-free exemptions for your first 10 consecutive years of residence.
What are the tax benefits?
A reduced tax rate on high value Portuguese employment income
Most NHR tax advantages apply to foreign income, but if you are employed in Portugal in a ‘high value activity’ you can benefit from a flat 20% income tax rate on the income. Normal income tax rates range up to 48%.
Tax-free foreign income
The non-habitual residence regime provides the opportunity to receive foreign income free of further Portuguese tax. In general, income from investments, royalties, rents, employment etc. from a foreign source will be exempt from tax (but with progression) in Portugal, provided the foreign state has taxing rights.
This can apply even if the income is not actually taxed in the home country. For example, UK dividends escape Portuguese taxation under NHR because they are taxable in Britain under the UK/Portugal double tax treaty, although the UK’s ‘disregarded income’ rules can eliminate this tax liability for non-residents.
In summary, under the NHR, British expatriates can potentially receive most UK rental income, capital gains on real estate, interest, dividends and non-Portuguese employment income tax-free.
NHR and capital gains tax
When foreign assets are sold, if the double tax treaty gives taxing rights to Portugal, the gain is taxable here. If the gain may be taxed in the source country, it is exempt with progression in Portugal.
This means that gains made on UK shares remain fully taxable in Portugal, even with NHR status. However, gains made on the sale of UK real estate are exempt from tax (with progression) under the regime.
What does ‘exempt with progression’ mean?
While the foreign income is not directly taxed in Portugal, it can be taken into account to calculate the tax rates applied to your income that is taxable in Portugal.
How is foreign pension income taxed under the NHR?
Although foreign pension income is no longer tax free under the non-habitual residence regime, it does benefit from a flat 10% tax rate. Considering the income tax rates range from 14.5% to 48%, the 10% tax is still a significant advantage.
UK government service pensions are an exception as they remain taxable in the UK only.
Are you eligible?
People of any nationality can potentially qualify for NHR if they have not been resident within the previous five calendar years. You have until 31 March of the year after you become tax resident in Portugal to apply.
You need to meet Portuguese residency rules and have a Portuguese taxpayer number (NIF) to register.
What happens after 10 years?
After 10 years, the NHR status and benefits fall away and you become liable to Portuguese tax on your worldwide income and gains at the full tax rates.
As you approach your 10 years, seek advice on effective, compliant, tax planning for Portugal. And make sure you’ve made the most of your NHR status. For example, you could potentially sell a UK property without capital gains charges and reinvest in a tax-efficient life insurance bond.
If you’re undecided whether to remain in Portugal, return to UK or move to pastures new, a cross-border wealth management adviser can help you weigh up the tax implications.
What other tax benefits are there in Portugal?
If you do not qualify for non-habitual residence, or your status has ended, Portugal can still be a tax-efficient home.
With careful planning and specialist advice, there are opportunities to enjoy extremely favourable tax treatment on capital investments.
Portuguese inheritance tax (stamp duty) is limited; at just 10%, it only applies to Portuguese assets, and spouses/children are exempt.
Portugal does have a wealth tax of sorts, but it only applies to property, rates are relatively low and it only affects those with Portuguese property worth over €600,000 (€1.2 million for couples).
Portugal has much to offer people looking for a relaxing – and tax-efficient – move to sunnier climes. Ultimately, the best course of action depends on your individual circumstances and aims. Take personalised, regulated advice from a cross-border specialist to ensure you do what’s best for you and your family and take advantage of suitable opportunities in Portugal.
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; individuals should take personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).