Many Britons have discovered that Portugal is a fantastic place to retire. It is not just about sun, sea and golf. Expat financial advisers Blevins Frank report that Portugal has actively encouraged new arrivals by offering extremely favourable tax breaks through the ‘non-habitual residence’ (NHR) regime.
If you qualify for NHR, you could enjoy tax-free foreign income – such as UK pensions – for your first ten years living in Portugal. Even without this special regime, however, Portugal can be a tax-efficient place to retire. First let’s look at how NHR works.
What Is Non-Habitual Residence?
The Portuguese government introduced the NHR tax regime in 2009 to encourage ‘high value’ industries and individuals to relocate there. It offers those working in a ‘high added value’ profession in Portugal a flat income tax rate of just 20%, but it can also provide significant advantages for retirees.
Under NHR, most types of income that comes from a foreign source or which is taxable in another country is exempt from Portuguese taxation for ten years. In practice, this means that expats can potentially receive some UK income and gains without paying tax in either country.
UK state pension and most other pension income is taxable only in Portugal under the UK/Portugal tax treaty, but because it comes from a foreign source it is tax-free under NHR. So however you access your UK pension savings – regular income, cash withdrawals or one lump sum – you can do so under NHR without paying tax in Portugal or the UK for ten consecutive years.
Civil service pensions and other UK income and gains – which are taxable in the UK under the treaty – are also exempt from Portuguese taxation under NHR rules. This remains the case even if they are not actually taxed in Britain. UK dividends, for example, can end up being tax-free for non-residents under the ‘disregarded income’ rules, although gains on UK shares do not qualify for NHR exemption.
Take note, however, that exempt foreign-source income may still be counted when calculating your overall tax bill for other taxable income or gains in Portugal.
How Do You Access NHR Benefits?
To be eligible for NHR you cannot have been resident in Portugal within the last five years. You also need to meet the usual residency requirements, such as spending at least 182 days in Portugal or having your main home there.
It is possible to backdate your NHR application to the date of your arrival. If you have recently arrived in Portugal or are thinking about making a permanent move here, you will need to register with the Portuguese tax authorities by 31st March 2018 for it to apply to this tax year.
Does Brexit Pose A Threat To NHR?
As a tax initiative managed by the Portuguese government, NHR is independent of the EU and available to any foreign national that meets the eligibility requirements. As such, Brexit will have no effect on whether Britons will continue to qualify for the scheme.
Of course, to be eligible for NHR you need to meet Portuguese residency rules, so if you are thinking about applying, it will be much easier to do this now with full freedom of movement as an EU citizen.
However, as with any law, the government can change the rules. Even if Portugal maintains NHR, it is possible that Britain may negotiate special exemptions to claim tax revenue from UK nationals resident abroad.
In November2016, the Finnish government did just that with a new bilateral agreement that lets them tax pension income of Finnish nationals with Portuguese NHR status from 2019. With Brexit forcing new negotiations between Britain and Portugal, the UK has a similar opportunity to plug the expat pensions tax leak without being constrained by EU obligations.
Taxation Outside NHR
Even without NHR, Portugal offers attractive tax benefits for expats. While UK pension income outside the NHR regime attracts the usual scale of Portuguese income tax rates up to 48%, in some circumstances you can receive up to 85% tax-free. Local inheritance tax (stamp duty) is also relatively benign – only applying to Portuguese assets at a fixed rate of 10%, with exemptions for spouses and child beneficiaries. Portugal also offers opportunities to enjoy extremely favourable tax treatment on capital investments.
Overall, Portugal has much to offer Britons looking for a relaxing – and tax-efficient –retirement in sunnier climes. Making the move under today’s rules is relatively easy, but no-one knows what will happen post-Brexit, so consider acting sooner rather than later if you want to secure that dream retirement in Portugal. However, as with anything to do with your financial security, take personalised, regulated advice to establish what is best for you and your family.
Portugal’s Golden Visa Scheme
Portugal’s Golden Visa Scheme, which launched in 2012 as a way of attracting non-EU buyers, was the first of its kind in Europe. It requires a minimum investment of €500,000 in property (or for properties older than 30 years, or situated in urban regeneration zones, the minimum investment is €350,000).
Alternatively, you can invest €1m in Portuguese companies, set up a business that creates ten jobs or invest at least €350,000 in scientific or technological research, according to expat financial advisers Blevins Franks.
In return, investors receive a temporary one-year residency visa, which can be renewed for up to five years in total. After six years, the holder can apply for Portuguese nationality.
The requirement to spend time in Portugal is minimal – just seven days in the first 12 months and 14 days a year for the following four years. Investors cannot sell their property for at least five years and to obtain Portuguese citizenship, you need to demonstrate an ability to speak the language and, less easy to qualify, show that you have made the effort to integrate.
Although British buyers will be eligible to buy properties through the Golden Visa route after the UK leaves the UK, the scheme was set up largely to attract wealthy non-European buyers from the likes of the Middle East, Russia and China, with the cost of obtaining the visa alone being €30,000.
- You can find much more information on retiring to Portugal and other European destinations by going to retiringtoeurope.com. There you can download the complete 276-page guide free of charge..