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The sun-soaked shores of Portugal are one of the most popular places for UK nationals to relocate. In this guide, we’ll explain how taxes work in Portugal, which impacts UK expats, and why your tax residency status is crucial to working out the best strategy for your wealth.
Table of contents
- Establishing Portuguese Tax Residency
- The Portuguese Non-Habitual Resident Programme
- Double Tax Treaties Between Portugal and the UK
- Tax-Efficiencies For UK Expats in Portugal
- Portuguese Income Tax Rates
- Social Security Contributions
- Tax On Rental Income For British Expats
- Understanding Wealth Tax In Portugal
- Succession Planning in Portugal
- Portuguese Inheritance Tax For Expat Residents
- Frequently Asked Questions about Taxes In Portugal
- Other European Specific Guides
- Related Articles
- Questions or Comments?
A beautiful Mediterranean climate, healthy economy and excellent quality of living make Portugal an enticing draw for families, professionals and retired expats looking for a better pace of life.
However, any international move brings financial implications, not least understanding the tax regime of a foreign country. Therefore, it is essential to know how the tax systems work and optimally structure your assets to remain tax-efficient.
Cross-border taxation is a complex area, and relocating as a British expat brings about hundreds of considerations, from inheritance taxes to your residency status.
There are also some exceptional opportunities to reduce your tax liabilities, with some of the UK tax rates being substantially higher than overseas.
Still, to take advantage of those prospects and ensure you aren’t unduly exposed to avoidable obligations, it’s vital to know the contrasts between the British and Portuguese tax systems.
Establishing Portuguese Tax Residency
Before you start looking at income tax rates and restructuring investments, you’ll need to identify whether you are indeed a Portuguese tax resident. This process isn’t automatic and applies on a case-by-case basis, depending on factors such as:
- Where your primary residence is located.
- If you live and work in one country.
- Whether you spend 183 days or more a year in Portugal.
- Where your business or revenue streams originate.
In the UK, we have a three-step test called the UK Statutory Residence Test. This test works through questions like those above to establish whether you are a British resident for tax purposes.
It is possible to be considered a tax resident of both Portugal and the UK, in which case double tax treaties apply. These must be applied correctly to avoid declaring taxes in the wrong country and potentially paying tax twice on the same income.
You may be considered a UK tax resident if the following connections apply:
- Most of your work or income comes from the UK.
- You have family and property in Britain.
- You spend more time in the UK than in Portugal, and at least 91 days over the last two years.
Generally, if you live in Portugal for at least 183 days of the year or six months, you will be considered a tax resident. Tax liabilities arising from the day of your arrival if you are relocating as a permanent expat.
Tax residency is vital since it determines which taxes you will need to pay, at what rate, and in which country. If in any doubt about your tax residency status, it is strongly advisable to seek professional advice before making any decisions about your financial future.
For Portuguese citizens looking to get permanent residency in the UK, look at our Tier 1 Investor Visa guide.
The Portuguese Non-Habitual Resident Programme
Post-Brexit, Portugal remains one of the most welcoming EU countries for expats. Schemes such as the ‘Golden Visa’ programme demonstrate how much the government wishes to continue welcoming British expats to its shores.
One of the regimes to be aware of is the Non-Habitual Resident (NHR) programme. This scheme offers substantial tax incentives for expats moving to Portugal for the first time or who haven’t been resident in the last five years.
NHR incentives include:
- Tax exemptions on foreign income, including UK pensions.
- Reduced tax liabilities for ten years.
- Exemption from higher rate tax activities such as employment.
Although the NHR scheme is highly attractive and provides significant tax benefits, there are rules in place to be aware of – adhering to these regulations can mean being exempt from any tax at all on your overseas pension fund.
However, it remains vital to seek professional advice. This is because UK pension schemes may be taxable in the UK, some revenue streams deduct tax at source, and a lot will depend on your residency and domiciliary status.
Therefore, you might have claimed tax exemption on a pension fund, only for your beneficiaries to find that they are liable for inheritance tax against that total when you pass away.
Double Tax Treaties Between Portugal and the UK
One of the key factors for many expats is in double tax treaties, meaning that you shouldn’t need to pay both the UK and Portuguese taxes on the same income, gain or event.
There are tiebreaker rules that help the respective countries decide where you should be a tax resident, and therefore be liable for tax on your primary income sources.
Again, this can be complicated, and your tax residency status could change along with your circumstances. For example, starting a new job, selling a property, or moving home could impact your tax status.
It’s also crucial to clarify your tax residency as quickly as you can.
- Taxes filed and paid in the wrong country may not be refundable.
- Failing to declare or pay taxes could be fined, penalised, and treated as tax evasion.
The best course of action is to establish where you are a tax resident and register with the tax authorities in your host country to declare your residency and ensure you are keeping up with filing returns and disclosures.
This process isn’t automatic. If you don’t register and yet are considered a tax resident, the authorities in Portugal might prosecute or issue heavy fines, so it’s essential to get this right from the time you relocate.
Likewise, there are tax incentives available, and you may miss out on those should you delay registering as a tax resident.
It’s also essential to make sure you pay the requisite social security contributions since failure to contribute might mean you cannot access state healthcare, pensions and benefits.
Make sure to read our expat guide to healthcare in Portugal.
Tax-Efficiencies For UK Expats in Portugal
One of the reasons it is worth consulting a financial adviser before the relocation is that tax treatments of different assets can vary between countries.
There may be some tax-efficient accounts or investments in the UK, which are not in Portugal, and vice versa.
For example, ISAs and Premium Bonds are tax-free in Britain and a popular way to save for the future without attracting tax obligations.
As in many European countries, both attract tax in Portugal and can often be restructured to lower tax exposure. However, you cannot contribute to an ISA as a non-UK resident, so drawing down the cash before relocating and investing in a more tax-efficient alternative may be preferable.
Other products in a similar category include unit trusts, equities, investment bonds and open-ended investment companies (OEICs). So again, advice from a tax specialist could substantially reduce your next tax return bill after moving to Portugal.
Portuguese residents pay a flat rate of 28% interest on all earnings from bank interest worldwide. However, you might be able to reduce that liability by adding the interest to your general income and paying tax against a standard tax bracket.
It’s worth noting that offshore accounts held in blacklisted locations, such as Guernsey and Gibraltar, are liable for a higher 35% tax charge.
Portuguese Income Tax Rates
The most significant tax many of us pay is income tax, and this works on a tax band system in Portugal, much as in the UK.
Other taxable earnings, such as capital gains, can be added to income and taxed according to the band, rather than liable for a flat rate.
Residents pay income tax on any global earnings, including rental income, pensions, employment or other revenue streams.
Income tax rates in Portugal for 2021 are:
|Taxable income €||Taxable income £||Tax rate|
|Up to €7,112||Up to £6,115||14.5%|
|€7,112 – €10,732||£6,115 – £9,230||23%|
|€10,732 – €20,322||£9,230 – £17,470||28.5%|
|€20,322 – €25,075||£17,470 – £21,560||35%|
|€25,075 – €36,967||£21,560 – £31,785||37%|
|€36,967 – €80,822||£31,785 – £69,490||45%|
|Over €80,822||Over £69,490||48%|
Remember that Non-Habitual Residents pay a flat rate of 20% against all income. There is also a reduced or deferred tax rate on dividends and other investment income, some of which are exempt.
Non-habitual residents pay no inheritance tax, wealth tax or gift tax, which can be an appealing option, offsetting income tax costs.
Social Security Contributions
Alongside income tax, Portuguese residents pay social security contributions equivalent to National Insurance in the UK.
This welfare system covers most workers, including self-employed people with various benefits, including:
- Maternity, paternity and adoption leave.
- Unemployment benefits.
- Financial support in old age.
Standard rates are:
- Employer social security contribution of 23.75%.
- Employee social security deductions of 11%.
- Total contributions of 34.75%.
Social security is charged against gross income.
Tax On Rental Income For British Expats
Many UK residents decide to keep hold of their British property when moving abroad. This option can be a great way to cover mortgage payments, retain an asset, and earn rental income simultaneously.
But, if you earn income from a British investment property, you still need to declare this and pay the taxes to HMRC. As a Portuguese tax resident, you must also report the income in Portugal as part of your worldwide income.
It is essential to declare the income correctly and claim a tax credit against your Portuguese tax liability – although this problem won’t arise if you are part of the NHR programme since this tax is not payable in Portugal.
Should you invest in a rental property in Portugal, this will be taxable locally. The tax rate depends on whether you are a resident or not (note that permanent residency and tax residency are not the same).
Non-residents pay a 28% flat rate after deductions.
Understanding Wealth Tax In Portugal
Tax residents in Portugal pay an annual wealth tax, charged on properties, or a share in property valued more than €600,000 (£516,000).
This charge is called the Adicional Imposto Municipal Sobre Imóveis.
Each individual has the same threshold, and partners can combine this to be exempt up to €1.2 million (£1.03 million), provided they are married or in a civil partnership.
Wealth tax is charged as:
- 0.4% of the total property asset value for companies.
- Between 0.7 and 1.5% of the property value for individuals.
- The highest 1.5% rate is charged on property worth over €2 million (£1.72 million).
There is also a property tax, called Imposto Municipal Sobre Imóveis (IMI), charged every tax year, calculated on December 31.
If the property is valued at under €66,500 (£57,200), and you earn under €15,295 (£13,150) per year, you are exempt from IMI.
Exemptions also apply, if the property has been purchased as a primary home, in which case property tax is not payable for the first three years, provided the home is not worth €125,000 (£107,500) or above, and you earn less than €153,000 (£131,500) gross, per year.
Should you sell a property in Portugal, you will need to pay capital gains tax, calculated as follows against 50% of the profit:
- Individuals pay 28%.
- Companies pay 25%.
There are exemptions here, too, in which case capital gains tax is waived. They include using the proceeds to purchase another primary residence in three years.
Portuguese tax residents selling UK property are taxed similarly, with 50% of the capital gain being taxable. The gain is added to your income and taxed according to the rate in your relevant band.
From April 2015, any residents in Portugal selling a UK property will also be liable for British capital gains tax against the value accrued since this date.
Succession Planning in Portugal
Succession planning is a crucial factor for expats moving to any international destination. It determines who can inherit your estate, what rules apply, and what inheritance taxes will arise.
One of the factors to be aware of is the forced heirship rule. These regulations mean that some beneficiaries are not permitted to receive your estate, and some relatives have an automatic entitlement.
- Stepchildren cannot be named as a beneficiary.
- An automatic entitlement applies to children, parents, grandparents and spouses.
These regulations can dictate the disbursement of as much as 50% of your estate. In addition, residents are subject to Portuguese succession laws across their worldwide estate but excluding foreign properties.
It is, therefore, crucial to understand how these regulations apply to you.
Portuguese Inheritance Tax For Expat Residents
A big draw for Portugal is that although there are property succession taxes, you can avoid them if the property is gifted to children or other beneficiaries. However, note that some assets can be liable for UK inheritance tax, which may not change even if an exemption exists in Portugal.
There is no inheritance tax (called Stamp Duty in Portugal) for:
However, other beneficiaries pay a 10% inheritance tax, making this a significantly better option than paying up to 40% tax in the UK.
These tax rates apply to all assets in Portugal, including properties and lifetime gifts.
Where an inheritance tax charge arises, it is the beneficiary and not the estate responsible for the obligation. Recipients cannot transfer assets until the tax charge has been met, and therefore inherited assets cannot be sold to raise funds to pay the inheritance tax.
A United Kingdom Will can be recognised in Portugal, but it is often advisable to construct a new local Will. This is because cross border wills must go through the UK probate system, then be translated, and then go through probate again in Portugal, which can be costly and time-consuming.
International wills can often contradict each other and give rise to conflicts and disputes, so having a Portuguese will is usually the best option for permanent expats.
Note that the double tax treaties between the UK and Portugal do not apply to inheritance tax. However, the UK provides unilateral relief to avoid one estate being taxed twice on the same assets.
For unmarried couples, the stamp duty rate of 10% applies to inheritances and lifetime gifts. This same rate is payable by non-direct relatives and other friends.
Unmarried couples who have lived together for over two years and registered with the tax authorities can be treated as married couples for tax purposes.
UK civil partnerships and same-sex marriages are all recognised and treated as spouses in Portugal.
Frequently Asked Questions about Taxes In Portugal
Yes, although the rate depends on the region where you live since this is a municipal property tax set by the local authority.
Properties are liable for rates from 0.8% for rural homes and between 0.3 and 0.45% for residences in towns and cities.
Income taxes work on a similar bracket system to the UK. Rates vary from 14.5 to 48.5%. Most employees or self-employed residents must also pay 11% of social security contributions.
However, there are some desirable tax benefits to living in Portugal:
Direct family members are exempt from inheritance tax, and it is charged at 10% for other beneficiaries.
The Non-Habitual Residence scheme offers a lower income tax rate of 20% for 10 years for expats employed in a ‘high value’ role and exempts some foreign-sourced income from tax.
There is no capital gains tax payable in Portugal when selling a UK property for scheme members.
The tax agreement means that most UK pensions are taxed in Portugal, at 10% for Non-Habitual Residence Scheme members for the first 10 years of residence.
Other expats are taxed at the standard income tax rates, up to 48% depending on their income tax band.
There are many options for pension schemes, such as transferring to a QROPS to ensure the fund is tax-compliant and will not attract UK taxes or overseas pension transfer charges.
You do indeed – expats living and working in Portugal or relocating permanently will need to register with the local tax office and be allocated an income tax number.
Returns can be submitted online or via paper copy, and the tax year runs from 1st January to December 31 alongside the calendar year.
Registration forms can be downloaded from the Autoridade Tributária e Aduaneira.
Failure to submit your tax return on time can be fined from €200 (£172) up to €2,500 (£2,150). Late payment penalties vary from 10%, up to double, capped at €55,000 (£47,300) plus interest.
It depends on your residency status and whether you are living in Portugal under the NHR scheme.
Self-employed professionals in ‘high value’ activities pay 20% income tax and social security after their first year of exemption.
Employees of Portuguese companies pay the 20% income tax rate, plus social security rates.
The below categories are exempt in Portugal from personal income tax and are not liable for social security contributions through the Non-Habitual Residence scheme:
Retirees in receipt of a lifetime pension or annuity.
Private investors in jurisdictions excluding those on the blacklist receive income in interest or dividends from debt or equity.
Private landlords receiving rental income or capital gains from properties outside of Portugal.
Employees working for a non-resident company based outside of Portugal.
Applicants must be new expats to Portugal and have not been tax residents within the last five years.
The NHR scheme is intended to make Portugal more internationally competitive and is aimed at individuals likely to become permanent residents.
Other European Specific Guides
Make sure you read the guide on moving abroad before you decide. In addition, you can find other European country guides following the links below.
Below is a list of some related articles that you may find of interest.
Questions or Comments?
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