Now the 2021 Portuguese tax year is underway, what can be expected when it comes to income tax, wealth tax, inheritance tax and non-habitual residency (NHR) rules?
The latest Portuguese budget has kept tax rates and rules the same for 2021. If you are already familiar with Portuguese taxes, this makes things a lot easier, writes Jason Porter, director at specialist expat tax and financial planning firm Blevins Franks.
However, with full Brexit now in place, this is one significant change that could bring new tax implications for UK nationals and anyone with UK assets in Portugal.
Income tax
For residents in Portugal, worldwide employment earnings, pension, rental and most other income over the year is added together to calculate their income tax bill.
For non-Portuguese residents, only income sourced from Portugal is taxable there.
Portugal’s sliding scale of income tax ranges from 14.5% to 48%. All seven income tax rates remain the same this year – which have actually been unchanged since 2018 – and the income bands are also the same as 2020’s.
Portuguese tax on investment income
The tax rules are different for interest and investment income, such as shares, securities and bonds, which attract a flat rate of 28%.
However, Portuguese residents have the option to pay tax at the scale rates instead, if that works out cheaper for them.
But if a bank account or investment is within a jurisdiction classed as a ‘tax haven’ by the Portuguese authorities, income is taxed at a higher rate of 35%.
This currently includes investments in Gibraltar, the Isle of Man and Jersey.
Capital gains tax
If Portuguese residents sell property or assets anywhere in the world, 50% of the gain is added to their annual income and taxable at the relevant income tax rate.
Crucially, however, they won’t be taxed if they sell a main home and reinvest the proceeds to buy a new main home in Portugal or elsewhere in the EU/EEA.
Post-Brexit, UK property is now classed as a non-EU/EEA asset, so they can no longer receive this exemption if reinvesting proceeds into a main home in the UK.
Retirees or residents aged over 65 can avoid Portuguese capital gains tax when reinvesting into an eligible insurance contract or pension fund – great news for downsizers. They must do this within six months of sale to qualify.
Meanwhile, non-residents face a flat 28% charge on 100% of any gain from Portuguese assets.
Non-habitual residency (NHR)
Portugal’s NHR regime continues to offer new residents highly attractive tax benefits for their first ten years there. If they have recently moved to Portugal and not been resident within the last five years, they should apply at their local tax office to lock in these significant benefits.
Under NHR rules, most foreign income, certain capital gains, interest and dividends can be taken tax-free in Portugal.
Key exceptions are UK government service pensions and rental income, which remain taxable in the UK. Non-habitual residents employed or self-employed in Portugal in certain ‘high added value’ professions can also benefit from a flat 20% income tax rate.
Since last year, NHR includes a flat 10% tax on foreign pension income and withdrawals, including lump sums.
But those who secured non-habitual residency before April 2020 can continue to receive most UK pension income tax-free for the remainder of their ten-year period.
Wealth tax in Portugal
Portugal’s Adicional Imposto Municipal Sobre Imóveis (AIMI) continues to apply a wealth tax of sorts to high-value Portuguese property, regardless of where the owner is resident.
Clients are only liable if their stake in Portuguese properties is over €600,000 (£516,325, $714,672), and then only on the value above that.
So, if, for example, they and their partner jointly own a Portuguese home, the property will only attract AIMI if it is valued over €1.2m.
Rates are 0.7% for individuals, 0.4% for companies, and 1% for properties over €1m. Some companies are not eligible for the allowance.
Portuguese inheritance tax (‘stamp duty’)
Portugal’s version of inheritance tax remains fixed at 10% and applies only on Portuguese property and assets inherited or gifted outside of the direct family.
Beware, however, that unless clients take action, Portugal’s ‘forced heirship’ succession law will automatically pass portions of the estate according to bloodline, regardless of written wishes.
Also remember that many UK expats continue to remain UK-domiciled, so take care to review their position regarding UK inheritance tax.
This article was written for International Adviser by Jason Porter, director at specialist expat tax and financial planning firm Blevins Franks.
