If you are looking for your dream home in Portugal, enjoy the search. There are so many wonderful properties here in fantastic locations, you’ll be spoiled for choice.
As always, though, it’s important to research and understand the implications of property ownership and being resident in Portugal, including all the tax considerations. Even if you’re only looking for a holiday home, you still need to be aware of what taxes you may face.
Tax residence
If you are only planning to use your Portuguese property as a holiday home for the time being, take care to understand the residency rules. While you are usually considered tax resident after spending 183 days in Portugal within a year, it can be earlier if you have a permanent home here.
Triggering residency makes you liable for Portuguese taxes on worldwide income and some capital gains.
Purchase and local taxes
On buying a Portuguese property, you are charged a transfer tax Imposto Municipal sobre Transmissões Onerosas de Imóveis (IMT). The rates vary depending on whether it is a main home or not, but in both cases, the progressive rates range up to 8%. A 0.8% stamp duty (Imposto de Selo) is also applied.
VAT may be payable on new or rehabilitated properties, and on properties within tourist developments. Verify this with the vendor prior to committing to purchase.
You are then subject to the annual Imposto Municipal sobre Imóveis (IMI), which is between 0.3% to 0.8% depending on the type, location and age of the property (7.5% where ownership is deemed to be based in a ‘tax haven’ jurisdiction).
Property ‘wealth tax’
If your stake in Portuguese property is worth over €600,000, you would attract Adicional ao Imposto Municipal Sobre Imóveis (AIMI) of between 0.4% and 1.5% each year, depending on the value and how the property is held.
However, the €600,000 relief per person means couples with joint ownership only face AIMI on properties exceeding €1.2 million, and then only on the value above this.
Capital gains tax
When you come to sell a Portuguese property, you could be liable for capital gains tax in Portugal and potentially also the UK, depending on where you are resident.
For Portuguese residents, your worldwide gains are added to other annual income and taxed at the scale rates between 14.5% and 48%. Only 50% of the gain is taxable, and inflation relief applies after two years’ ownership.
Your main home may be exempt from capital gains tax if you use all the proceeds from selling a main home to buy another home within a set period. This only applies if the new home is in Portugal or the EU/European Economic Area (EEA). Another exemption applies if you are retired or aged over 65 and reinvest gains into an eligible insurance contract or pension fund within six months of sale.
Since 2023, non-residents selling Portuguese property are taxed the same as residents. Some gains from Portuguese assets are also taxable in the UK for UK residents. While a credit is available where tax is paid twice, you will pay whichever amount is larger.
Owning property through a company
Buying Portuguese property through an offshore corporate structure does not provide tax advantages.
Where a non-resident company’s value consists of 50% or more in Portuguese real estate, the gain on the transfer of shares may be subject to 25% Portuguese corporation tax (35% if from a ‘tax haven’).
Companies trading in properties do not qualify for the wealth tax allowance, which means many ‘enveloped’ properties are liable for 0.4% on the property’s entire value each year.
Inheritance taxes
Finally, consider what tax your beneficiaries will pay if they inherit the property on your death or you gift it during your lifetime. Passing on Portuguese property to any recipients other than your spouse, children or parents will incur a flat 10% Portuguese stamp duty, wherever they live.
You also need to follow the latest UK rules to understand how long your Portuguese property and worldwide estate will remain within firing range for 40% UK inheritance tax after you move to Portugal.
With careful planning, it is possible to significantly reduce your tax liability, not just on your Portuguese home, but on your worldwide assets, investments and pensions, for you and your heirs.
Cross-border tax planning is complex and difficult to get right, so take personalised, professional advice to secure the financial peace of mind to fully enjoy your new home in Portugal.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
By Sharon Farrell
|| features@algarveresident.com
Sharon Farrell is a Partner of Blevins Franks in Portugal.
www.blevinsfranks.com
