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10 Most Common Mistakes British Expats Make Before Establishing Residency in Portugal Image

10 Most Common Mistakes British Expats Make Before Establishing Residency in Portugal

April 25, 2023

Many British expats are tempted by what Portugal has to offer and are making plans for moving to Portugal. However, not everything is going to go to plan. You need to set some time aside for research to ensure there are no unexpected surprises.

 

While the thought of living in Portugal is very appealing, you can only enjoy life in your new country of residence if you deal with any potential stressors beforehand. What mistakes should you avoid making?

 

1. When I move to Portugal I won’t have to pay any inheritance tax

 

 

A major attraction for expats in Portugal is that there is no inheritance tax as such in the country. However, there are some factors that you still need to consider.

 

Portugal has rules on who you can pass your estate onto. These ‘forced heirship’ regulations dictate that you must pass on a fixed portion of your wealth onto direct family members, such as children or a spouse. If you have different plans for how your estate will be distributed you must create a will in Portugal stating your wishes and that you want to bypass forced heirship rules.

 

Note that under Portugal tax laws there is still a 10% stamp duty (imposto do selo) payable on assets inherited on death or as a lifetime gift. However, any assets passed onto immediate family members are exempt from this.

 

The main mistake that many British expats make is assuming that living in Portugal means your estate is immune from paying UK inheritance tax.

 

This is because UK inheritance tax is based on the legal concept of domicile, not residency. Most people born in the UK will automatically have UK domicile (domicile of origin). While it is possible to change one’s domicile (to a domicile of choice) it can be very difficult as the process has no fixed rules you can follow. Even if you were successful in changing your UK domicile to reduce inheritance tax liability, HMRC will still rigorously investigate your background – from family and social connections to business interests – and are capable of using even the most minor links to the UK to make you liable for UK inheritance tax

 

The reality is that residency in Portugal may not stop HMRC from deciding you have UK domicile. If this happens, after you die the beneficiaries of your estate must pay UK inheritance tax of 40% if your estate is worth £325,000 or more. For those married or in a civil partnership, a shared allowance of £650,000 is protected from UK IHT. If your partner dies and has made you their sole beneficiary you can inherit their personal inheritance tax allowance. If you both eligible to take advantage of the main residence exemption – £175,000 each – then you can have a tax-free allowance of up to £1000,000.

 

However, although there is relief available for UK inheritance tax, it would be a shame if inadequate financial planning meant you were unable to take full advantage of Portugal’s far more favourable succession laws.

 

A good financial advisor with experience of servicing British expats in Portugal will be able to legally reduce your exposure to UK inheritance tax. When planning your move, don’t delay and speak to a professional as soon as possible.

 

2. Relocating to Portugal will not affect my life insurance

 

 

Moving to Portugal is a major life event, and it’s essential you have financial protections in place to ensure you and your family are covered should the worst happen. While you may already have existing life insurance policies in place, it’s likely your current insurance strategy will need to be reassessed once you achieve residency in Portugal.  

 

The majority of UK-written life insurance policies could provide limited or no cover at all outside the UK, so any policies you took out prior to your relocation may not provide the continuity of cover that you need. It’s imperative you have insurance in place that ensures financial security for your loved ones in the event of your death or your inability to work through illness or injury. 

 

To ensure you are financially protected, review your current insurance planning by speaking to an insurance specialist with experience of helping British expats in Portugal. Types of insurance to consider include term (life) insurance, critical illness, serious accident, income protection and medical insurance. 

 

3. I don’t need to inform HMRC when I exit the UK

 

 

The best step you can take to ensure relocating to Portugal is successful is to make sure you exit the UK cleanly and correctly. What do we mean by this? A mistake that many British expats make is failing to inform HMRC when leaving the country. Not doing so can leave you exposed to paying tax in both the UK and Portugal. To avoid this, ensure you complete Form P85 (available at www.hmrc.co.uk) 1before you leave the UK. Another essential tool is the 2013 UK Statutory Residency Test, which will let you plan the date from which you become non-resident.

 

Once you have residency in Portugal it’s likely that you will still visit the UK on occasion (to spend time with friends and family, for example). The UK Statutory Residency Test tells you how much time you can spend in the UK without triggering tax residency there, based on your ties and connections (such as family and social links, business interests etc).

 

Deciding when to leave the UK is also important. In an ideal world this would be at the end of the UK tax year on 5 April, but realistically this may not be possible or practical for your plans. In that case, there are split year rules that automatically apply – starting full time work overseas; your partner or spouse starting full time work overseas; or you ceasing to have a UK home.

 

Make sure your exit from the UK does not negatively affect your tax planning by speaking to an expert financial advisor experienced in both UK and Portugal tax when planning your move.

 

4. I can spend as much time as I want in Portugal and the UK

 

 

Many British expats in Portugal take advantage of Non-Habitual Resident status (NHR), a fiscal regime that offers a range of tax benefits in your first 10 years of residency in Portugal (more details in No.9, below).

 

There are, however, some residency requirements for NHR status. You must stay for a minimum of 183 days in the country every year. You must have a property in Portugal that you use as your primary home.

 

It’s likely you will also want to spend time in the UK visiting friends and family. You must keep careful note of the duration of your visits as there are certain tests that will automatically deem you UK resident (and thus liable for UK tax), such as if you have spent 183 or more days in the UK in the tax year, for example.

 

As mentioned earlier, the 2013 UK Statutory Residency Test will tell you how many days you can spend in the UK without accidentally triggering tax residency, based on your ties and connections to the country.

 

5. My financial advisor and investment strategy will stay the same once I move to Portugal

 


While you may have cultivated a productive relationship with your current UK-based financial advisor, moving to Portugal means you may have to reassess, as most UK-based advisors will not be qualified to advise clients that are tax resident in Portugal.

 

You will need to find a new fully regulated financial advisor authorised to service clients based in Portugal and the EU. During your search, prioritise finding a professional with a good track record on advising British expats in Portugal, who will be familiar with both the UK and Portugal tax systems.

 

As well as finding a new advisor, it’s likely that your financial planning itself will have to change. It’s possible that any UK-based savings, pensions and investments will not be as tax-efficient in Portugal as they were in the UK.

 

If you plan on retaining any business or property interests in the UK consult an adviser to identify any double taxation liabilities. While there is a double taxation agreement between the UK and Portugal, you will still need the services of a financial advisor to ensure you don’t make any costly mistakes.

 

A sound financial strategy is essential when moving to a new country, and it’s particularly important if you will rely heavily on your savings and investments, as will be the case for those planning to retire to Portugal from the UK. Speak to a financial advisor to review your current plan and make any changes necessary. An experienced professional will offer bespoke solutions tailored to your level of risk tolerance, investment horizon, how much you are prepared to invest and your accessibility to capital.

 

6. I don’t need to rent first before buying a property in Portugal

 

 

Amid the excitement of relocating to Portugal it’s easy to get carried away and quickly make big commitments, such as buying a new home. But it’s important to take your time when deciding where to live in Portugal. The worst outcome would be to jump into buying a home in a region of Portugal that you eventually come to dislike. Renting first gives you time to decide whether you like the neighbourhood and area you’ve chosen. If not, you have the freedom to keep searching until you feel ready to buy.

 

Invest time in your rental search. Speak to local letting and estate agents to gauge what the property market is like in Portugal, the availability of housing stock and how to go about renting a home (such as deposits, rental laws, references etc). It would be sensible to make at least one trip to Portugal ahead of the big move to scout locations and potentially even view properties in person.

 

If for whatever reason you can’t search for a place before moving to Portugal, secure a holiday home or Airbnb rental for the first few weeks of living in Portugal while you search for something longer term.

 

7. I have plenty of time to sell my UK home and claim private residence relief from UK capital gains tax

 


Relocating to Portugal will likely mean you sell your UK home to fund buying a new one in Portugal. While there is relief available from UK capital gains tax if you are selling your main home, there is a time limit.

 

You will be exempt from CGT if you sell your UK main home before exiting the UK, or within nine months of leaving the country. Beyond this window, however, you may be exposed to capital gains tax both in the UK and Portugal.

 

Portugal also has rules for property and CGT that you should be aware of. While the country does grant relief from capital gains tax, this is only available if you reinvest the proceeds from the sale into another primary home in Portugal, or anywhere in the EU/EEA that has a tax treaty with Portugal, within a certain amount of time.

 

If you are a Portuguese resident with NHR status you will pay any CGT due in the UK but not in Portugal. If you don’t have NHR status you may have to pay CGT on the sale of the property in the UK and Portugal.

 

For those planning retirement in Portugal, those who are retired or aged 65 and over can now take advantage of additional capital gains tax relief if you reinvest the proceeds of the sale of your main home into an appropriate insurance contract or pension fund within six months of the sale.

 

8. I don’t need a budget for moving to Portugal

 

 

Your first few months of living in Portugal with all its attractions – from sunny weather to vibrant culture and world-class beaches – could easily feel like you’re on holiday. With that comes the temptation to spend like you’re on vacation too, which might mean you live beyond your means, even though there is a lower cost of living in Portugal. You need to create a realistic budget that you can stick to, one that has a comfortable cushion to absorb any financial setbacks (if you take longer finding a job, for example) and cover emergencies.

 

Ensuring your incomings will always exceed your outgoings is particularly important for those planning retirement in Portugal, who will need to rely on their savings, pensions and investments for income. The right financial advisor will employ cash flow analysis tools to create a budget tailored for your requirements. Using interchangeable variables (like future income requirements, size of investment, expected returns, tax rates, anticipated inflation rates and life expectancy), your advisor can tell you how long your financial assets are likely to last you, from worst to best-case scenarios. It can also be useful for situations such as end-of-life care and ensuring you can pass on a sizeable legacy to your children.

 

9. There’s no need to learn about taxation in Portugal

 

 

Failing to understand how Portugal taxes for expats work could mean you miss out on a major benefit of being an expat in Portugal.

 

The country’s Non-Habitual Resident regime (NHR) offers expats many tax benefits in their first 10 years of residency in Portugal. Examples include:

 

  • 10% tax on pension income. Even lower tax rates are possible If you have a QROPS or QNUPS, provided you correctly structure your income benefits. This is achieved by paying pension income via a temporary annuity where a fixed sum of income is specified for three, five or 10 years. The pension trustee then confirms that the income is paid as a temporary annuity. Doing so ensures just 15% of your pension income is taxed. Under NHR pension tax rates of 10%, this results in an effective tax rate of only 1.5% (with the caveat that it is not always possible to structure annuity payments in this way).

  • Income is taxed at a flat rate of 20% if you earn income or are registered self-employed.

  • Foreign source is not taxed in Portugal. In addition to this, foreign sourced dividends can be tax-free both in Portugal and the UK because of the ‘disregarded income’ rules for non-resident UK citizens.

 

The best thing you can do is engage the services of a financial advisor who can help you apply for NHR status and take full advantage of this fiscal regime’s tax benefits.

 

10. Living in Portugal without a D7 visa

 

 

Despite the difficulties posed by Brexit, moving to Portugal is still possible as long as you obtain the right residency visa. This is important as otherwise you will only be able to stay in the country for just 90 days within a 180-day period.

 

If you’re exploring how to retire in Portugal, your best pathway to residency is a D7 visa in Portugal. The passive income visa is designed for those who can show they receive passive income (such as from pensions, investments, rental income).

 

Successfully obtaining the D7 Visa will let you stay in Portugal for four months, after which you can apply for a one-year residency permit. This can be renewed every two years and after five years you can apply to become a permanent Portuguese resident. Furthermore, a D7 visa in Portugal offers unrestricted travel throughout the Schengen Area in Europe.

 

Finally, this residency visa will then allow you to apply for NHR status, giving access to its many tax benefits – ideal for those planning on retirement in Portugal.

 

Extensive preparation and planning is key when relocating to Portugal. Avoid taking shortcuts to ensure you don’t make any mistakes.


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