Property Tax in Portugal

Following our feature on Spanish property tax and the Canary Islands last week, we are now looking at property tax in Portugal.

Portugal is another popular destination for UK overseas property buyers, and for those looking to be long-term residents the property tax regime can be very beneficial.

The Non-Habitual Regime (NHR) for new tax residents was introduced by the Portuguese government in 2009 to encourage new residents to invest in Portugal.

The NHR scheme provides beneficial tax treatment for the first ten years of residence in Portugal and is open to both those in employment and the retired. Anyone who has not been tax resident in Portugal for any of the previous five tax years can qualify for the scheme.

Most importantly for retiree UK overseas property investors is the fact that any income received from a UK pension is exempt from Portuguese tax under the NHR scheme, providing the income is taxed in another country under the terms of the tax treaty, or is not regarded as Portuguese source income under Portugal’s domestic legislation.

Effectively UK pension income from private, company and state pensions can be excluded from taxation in both the UK and Portugal.

When coupled with the new UK pension freedom rules allowing you to take lump sums from your pension fund in preference to converting to an annuity, it is easy to see how the lump sum could be used towards that dream overseas property purchase in Portugal.

Furthermore, the NHR scheme can be beneficial for other sources of UK income such as dividends.

UK dividends would be tax free in Portugal, as the UK/Portugal treaty provides they may be taxed in the UK. In the UK however, the ‘disregarded income’ rules for non-residents mean that it is unlikely to be taxed in the UK either.

Wealth Tax

Wealth tax can be a concern for wealthier investors in Europe. For example Spain and France calculate annual wealth tax on worldwide assets at rates of 1.5 and 2.5 per cent respectively.

Portugal has also introduced a wealth tax, but at only 0.3 per cent, and only on Portuguese property, valued at over €600,000. The allowance is also per individual, so a married or civil couple would only face wealth tax on jointly-owned properties over €1.2m.

Inheritance Tax

Inheritance tax in Portugal only applies to Portuguese assets and is set at just 10 per cent. In addition, spousal and child beneficiaries are exempt from the tax.

Portugal allows non-Portuguese nationals to elect to apply the succession regime of their nationality by requesting this in their will. This could be important to UK nationals living in Portugal, as standard EU succession rules will cease to automayically apply to UK nationals when Brexit is completed and Britain leaves the EU.

All in All, Portugal seems to have a very beneficial tax regime. Particularly for those UK overseas property investors looking to become long-term residents.