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Portugal Tax Planning Opportunities for British Expats with Residency in Portugal Image

Portugal Tax Planning Opportunities for British Expats with Residency in Portugal

March 08, 2022


Everything you need to know about Portugal Capital Gains Tax Relief for British Expats living in Portugal who are looking to downsize their main residence. 


For many of us, our homes will be amongst the biggest investments that we will ever make. Consequently, those approaching their later years will often decide that downsizing a main residence or family home is the best way to ensure a comfortable retirement. This is because choosing to trade in the space of a larger home that you may no longer need – due to children flying the nest, for example – for one that better suits your lifestyle has financial as well as practical benefits.


Downsizing allows you to release the equity locked within your former residence, as well as take advantage of any capital gains that have accrued. It ensures you have ready access to funds that can augment retirement – particularly if you invest it in tax-efficient structures, such as certain pension plans – as well as ensuring you can still leave a substantial legacy for your heirs.


For British expats who are Portuguese resident, this is an even more appealing option, representing an opportunity to retire prosperously in a country with a low cost of living and affordable properties, as well as a sunny climate, vibrant culture and cuisine, and beautiful coastline, countryside and cities.


When contemplating downsizing and retirement in Portugal it’s important, however, to factor in Portuguese capital gains tax, and the possibilities for tax relief. Careful planning – and expert advice from a trusted financial advisor – will ensure you can avoid any pitfalls. Here’s what you need to know.


Portugal Tax


Capital gains tax (imposto sobre mais valias) in Portugal is levied on the sale of all property. If you are a Portuguese tax resident then CGT is payable on 50% of the gain on any Portuguese property that you sell. This is added to your other income for the tax year and taxed at scale rates of 14.5-48%. Inflation relief is given if the property was owned for more than two years.


Non-residents who own a Portuguese property must pay tax on 100% on capital gains, at a rate of 28% (25% for companies).


CGT is not payable on any properties purchased before 1 January 1989.


Tax relief for CGT


There are two options for obtaining tax relief on CGT if the property in question is your main home. The first solution is for you to invest the proceeds of the sale of your property into another main home in Portugal or the EU/EAA (this could also be land for development – to build a home). There is strict criteria accompanying this. The new purchase must be within a certain time period – no more than two years before the sale of your original property and no more than three years after the sale. Furthermore, you must occupy your new home within 36 months of the sale. There are other caveats, such as the fact that the purchase must be real estate only, and all records and details of the transaction should be correctly declared on your annual tax return.


Alternatively, you can reinvest the proceeds into certain long-term saving plans or pensions (there is also the possibility of combining these two options). This is a particularly attractive choice for British expats living in Portugal looking to downsize as a way of enhancing income in retirement. But how is this achieved?


In order to qualify for CGT tax relief any investment must be made within six months of the date of sale, and the property in question needs to have been your main home. You must be either retired or at least 65 years old. Furthermore, withdrawals from any savings plan or pension are limited to a maximum of 7.5% per annum of the amount invested. Any intention to invest funds in this manner needs to be declared on your tax return of that year.


Non-Habitual Residency


British expats living in Portugal may have successfully applied for the country’s Non-Habitual Residency scheme, a tax regime available in the first 10 years of residency that offers a range of significant tax benefits. It’s important to note though that relief from CGT is not included in this. Mitigation can only be achieved, as outlined above, through reinvestment into another main home or via specific investment products such as a QNUPS (Qualifying Non-UK Pension Scheme) or a tax-efficient wrapper such as a Portuguese Compliant Bond – a unit-linked single premium life insurance contract.


Expert advice on Portugal Tax for Expats


Downsizing your main residence can contribute towards a secure and easy retirement in Portugal, as long as you plan carefully and seek guidance from a qualified financial advisor or wealth management firm.


Give us a call today on +44 207 998 0570 or e-mail enquiries@fwm.gi to book your free, no obligation consultation to discuss your specific cross-border financial planning needs.