Are you planning to move from the UK to Portugal and looking for advice on wealth planning? Here are some financial considerations to keep in mind.
Moving to Portugal from the UK
Many UK expats move to Portugal for the relatively low cost of living, the expat community and friendly locals, the food, the year-round sunshine and, above all, the tax system and pension incentives.
Brexit may mean more forward planning and paperwork is required, but most UK nationals can still fulfil their dream of living in Portugal, especially if they are retired. There are many financial advantages to living in Portugal.
Before you physically leave the UK, there's a lot to consider. Ideally, you should visit Portugal at least once to get a feel for the country, to properly assess the cost of living, to decide what your life in Portugal will be like and to decide where you want to live and whether you want to buy or rent.
Take time to consider how your existing tax and investment structures will change when you move. Wealth planning considerations are often overlooked and underestimated.
Tax planning in Portugal as a UK expat
The UK has a residence-based tax system. This means that if you are considered "tax resident" in the UK, you pay tax to HMRC on all your worldwide income. If you decide to move to Portugal, you would need to consider that tax residency is not necessarily the same as physical presence in a country. This may affect your wealth planning. A change in tax residency almost always means a change in how and where your investments are taxed.
There is a range of different taxes you could be liable to pay once you’ve moved to Portugal, including:
- Income Tax
- Capital Gains Tax
- Property Tax
Where are you tax resident?
Once you are tax resident in Portugal, you'll have to pay tax on worldwide income and certain capital gains in Portugal.
You are usually considered tax resident in Portugal after 183 days, but it can be earlier if you move with the intention of making Portugal your permanent home.
You may be considered tax resident in Portugal if:
- you have a permanent residence in Portugal on 31 December of the tax year in question; or
- the head of your household is resident for tax purposes in Portugal; or
- you work for the Portuguese state, regardless of where you work from; or
- you are a crew member on a ship, yacht or aircraft owned by a Portuguese entity
You also need to be mindful of the residency requirements in your country of origin. Under UK rules, for example, you could inadvertently establish tax residency and potentially be exposed to British taxes again after only 16 days of being present in the UK.
If you plan ahead and are flexible, it is possible to time your change of residency to minimise your tax liability and maximise your opportunities, in both countries.
Tax residence and domicile
Note that tax residence, which is relevant to income, gains, dividends and other forms of income, is not the same as domicile. Domicile is relevant for inheritance tax purposes and, whilst one may be living in Portugal, it may be possible to still be UK domiciled, which means HMRC will be able to levy inheritance tax on your worldwide assets.
It is vitally important to understand your domicile position, and how and when this may change in your particular circumstances, in order to avoid unforeseen claims on your estate on death. Your will would also need to be revised to take into account your change of status.
It is worth speaking to a cross-border wealth adviser who is familiar with the tax systems in the UK and Portugal before you move your residence there.
Portugal can be very tax-friendly for expats. While income is taxed at progressive rates of up to 48%, there are ways to reduce taxes on your investment and pension income.
Portugal’s NHR tax regime
The Portuguese Non-Resident Tax (NHR) programme was created to promote Portugal's growth, attract foreign investment and attract "high value" residents. Under this scheme, qualifying individuals can benefit from significant tax advantages, including reduced or exempt taxes on certain types of income for a period of 10 years.
- your pension will be taxed at 10%
- your income tax may be limited to 20% (in the case of a high value-added occupation)
- you will not be taxed on foreign dividends, royalties or interest, provided that they arise from a whitelisted jurisdiction. (The income may potentially be taxed in the source country under the provisions of a tax treaty, or, in absence of one, in terms of the OECD model treaty)
- you will also not be taxed on income or gains from foreign property, as above
How to apply for the NHR in Portugal
To be eligible for the NHR programme, you must:
- not have been tax resident in Portugal for the five years preceding your application
- be tax resident in Portugal
- apply for NHR status with the Portuguese tax authorities
The NHR application, which is a manual application, can be made as soon as you have physically moved to Portugal.
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Structures for savings and investments
A potentially costly mistake for expatriates is assuming what was tax-efficient back home is the same in Portugal. Once you are resident in Portugal, you gain access to opportunities to enjoy extremely favourable tax treatment on capital investments. For example, you may consider a single premium unit-linked assurance policy that is compliant for Portugal yet can include portability features for the UK should do decide to return to the UK.
Consult a local adviser who understands the Portuguese tax system and how it interacts with UK rules to rethink your financial plan. Do not hold on to investments that do not comply with Portuguese regulations, as this can lead to unnecessary penalty taxes.
The exchange rate between the British Pound and the Euro can fluctuate. It is therefore important to eliminate unnecessary currency volatility to avoid liability mismatching – The currency you rely on for your income and growth should be matched to the currency of the country you live in and where you are spending your money.
You may want to consider using a foreign exchange specialist to transfer money between your UK and Portuguese bank accounts, as they may offer better exchange rates and lower fees than traditional banks.
If you are considering moving to Portugal and taking a UK pension, you will need to to consider taxes in both countries. The way your pension income is taxed in Portugal depends largely on what type of pension you have and, in some cases, how contributions were made.
Under UK rules, in most cases, if you have a non-government UK pension you can take a tax-free lump sum at the commencement of your pension, subject to the new maximum amount of £268,275. Once you become resident in Portugal, it will be taxed at the Portuguese marginal tax rates, unless you are within the NHR period, which means you will enjoy a reduced tax rate of 10%. Income from government service pensions is always subject to UK tax and is not taxed at all in Portugal.
Pensions are not always set in stone and part of wealth planning is reviewing your existing UK pensions to ensure that your investment strategy and platform is well-suited for you in the future. This could mean changing your investment profile, opting for a EUR-denominated strategy that is in line with your risk tolerance or developing an alternative strategy that considers your overall financial situation.
It makes sense to use Portuguese-compliant structures that, in addition to mitigating risk, provide estate planning advantages. Our wealth team is uniquely placed as we have the appropriate regulatory permissions to support our UK expats living in the EU and Portugal in particular.
Early discussions with an experienced cross-border financial planner about your existing investment structures and whether they are still suitable for you in Portugal are crucial. Careful and early planning can help you avoid tricky tax situations, maximise your tax benefits, especially under the NHR, and ultimately save you money.
We are independent cross-border wealth experts who are regulated in both the UK and the EU and, by being knowledgeable in both jurisdictions, we are able to assist you with seamless end-to-end wealth planning (which few other advisers can). Speak to us about financial planning to see how we can create the right solution for your needs.
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The information contained herein is for informational purposes only which is subject to change and should not be relied upon. You should seek advice from a professional adviser before embarking on any financial planning activity.
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