Sarah is 54 years old, recently divorced and her children have grown up and left home.
She had worked the majority of her adult life in various marketing roles in the oil and gas industry; but, as the family became more comfortable, she stopped, and used her time to help with her ailing parents.
With the break-up of her marriage, and the recent death of her mother, Sarah is looking to completely change her life and move to Portugal.
The financial settlement from the divorce, and the inheritance she has received from her mother’s estate, means she has the following assets:
- The main home in Redhill worth £1m ($1.3m, €1.14m);
- Three buy-to-let properties worth £750,000, with an inherent capital gain of £250,000, but only £50,000 since 5 April 2015;
- Isas worth £150,000;
- Cash of £400,000 (mother’s estate); and,
- A self-invested personal pension (Sipp) worth £500,000.
Sarah plans to sell her main home and the buy-to-let portfolio over the next 18 months. Those who have properties in Virginia, USA that they want to sell may go now to this website. After selling your home, you may start processing documents needed for you to move or retire overseas.
She has always been interested in history and culture and is passionate about art and architecture. Her first choice would be to move to Lisbon, or the surrounding area such as Cascais.
She has visited Lisbon on several occasions and has been offered employment with an oil products company. Lisbon is currently undergoing a property boom, and Sarah has her eye on three or four different three-bedroom apartments.
She believes £500,000 will be sufficient for the purchase. She intends to live by drawing down on her capital but does not envisage needing more than £25,000 – £50,000 per annum, on top of her salary.
What taxes are payable on buying a home in Lisbon?
On purchase, she is potentially liable to:
- IMT – a transfer tax payable on purchase. It ranges from 1% to 8%, with rates depending on the price, the property’s ultimate use and whether it is to be the main or a second home.
- Imposto de Selo – an additional stamp duty, of 0.8%, payable on purchase.
- New-builds attract 23% VAT (with no IMT), inclusive in the property price.
Annually, Sarah could also be liable to:
- IMI – the Portuguese version of UK’s council tax, with rates varying from 0.3% to 0.8%. The rate could be up to 10%, if ownership is via a ‘blacklisted’ (tax haven) structure.
- AIMI – Introduced in 2017, an additional IMI, or ‘AIMI’ is seen as Portugal’s version of a wealth tax, for Portuguese property worth over €600,000. Rates are 0.4% for properties in a company, 0.7% for individuals and 1% for property valued over €1m. The €600,000 allowance is per person, so a jointly owned property will only attract AIMI on a value in excess of €1.2m.
What should Sarah know about the Portuguese tax system?
In 2009, the Portuguese government introduced the non-habitual resident (NHR) tax regime for any new arrival who has not been resident in the previous five years. It provides beneficial tax treatment for the first 10 years of residence.
There is an exemption from tax for certain foreign-source income, provided certain conditions are met. For those who intend to live off pension income, interest and dividends from investments, this could mean almost tax-free income for ten years.
What might this mean, in terms of Sarah’s pension scheme
When you factor in the UK’s ‘pension freedoms, which allow you to simply drawdown pension capital on a regular basis or take the whole of the pension pot as a single lump sum, this should result in zero taxation in respect of Sarah’s pensions.
Sarah may wish to consider transferring her Sipp to a Qrop (qualifying recognised overseas pension), to ‘future-proof’ her tax planning from any legislative changes future UK governments might make to pension law.
As a Portuguese tax resident, Portugal would have the taxing rights according to the UK-Portugal Double Tax Treaty (DTT) on the Sipp, and the Qrop.
The DTT and NHR mean there would be no tax to pay if Sarah commuted the whole of her pension. Sarah’s future entitlement to a UK state pension will also be taxable in Portugal rather than the UK, if she continues to reside in Portugal.
What would the tax position be on Sarah selling her main home and the rental properties in the UK?
Selling the UK main home should not give rise to a tax liability. Selling down the buy-to-let properties is best left until Sarah has departed the UK, as any UK CGT liability will only be charged on the increase in value since 5 April 2015 rather than the whole gain.
What should Sarah do with the investments she has outside of her pension?
The Isa should be encashed before she leaves the UK, as no tax would be payable in the UK as they are exempt assets. Isas would be fully taxable in Portugal.
She could utilise an offshore life assurance policy, as a tax efficient investment wrapper. A Portuguese-compliant policy would enable her to defer any tax on interest, dividends and gains to the point she needed to make a withdrawal. Even then, the taxable element is not the whole ‘profit’ accrued to date, but a proportion of it.
As an example, a policy started with £100 has increased in value to £110. If a withdrawal of £11 is made, it will include a profit element of 10 to 110 (1/11th), so only £1 of the £11 is taxable.
Furthermore, the tax rate applied to the taxable element falls after five years, so only 60% of tax is payable, and only 20% after eight years.
Conclusion
Sarah will have restructured her tax affairs for living in Portugal, with the minimum of tax exposure from both a UK and Portuguese perspective.
Going forward, she will be able to benefit from NHR in Portugal to the maximum extent and will be able to draw down on income and capital to supplement her lifestyle with little tax to pay during this period and beyond the preferential 10-year period.
Jason Porter is a director of specialist expat financial advisers Blevins Franks, which was recognised as the Best Overall Adviser Firm in the International Adviser Best Practice Adviser Awards, run in partnership with Old Mutual International.
