With Portugal offering such favourable property opportunities in outstanding surroundings, it is clear why many Britons choose to retire to their own place in the Algarve.
Whether you buy a main home or just somewhere to holiday, property is most likely your biggest asset. Usually the most expensive item you own, it also has the potential to provide a substantial return on your initial investment over time. Many also view their home as a lasting legacy to secure the financial future of children and other heirs.
However, there are risks in relying on bricks and mortar for your wealth. After all, you cannot fully realise the financial benefits of a property while you are living in it and, compared to other investments, property can prove costly to maintain.
Affording retirement
As life expectancy increases, it is sensible to consider the affordability of retirement over the long term. Are your pensions, savings and investments enough to sustain the lifestyle you want for as long as you need?
Many British retirees find themselves in an ‘asset rich, cash poor’ situation – owning ‘physical’ wealth like property but having substantially less disposable income. Expatriates, for example, often hold on to UK property in addition to their Portuguese home, whether for sentimental reasons or as part of their investment portfolio.
While property can be a solid investment, it locks your money away in a highly ‘illiquid’ way. If you want to access your capital, you may not be able to sell easily or for an acceptable price. Investment funds, on the other hand, spread risk across a range of different assets that may include property alongside equities, bonds, etc. Unlike property, if you require small amounts of cash you can just sell the amount you need, not the whole investment.
Property can provide leveraging opportunities – for example, freeing up cash through equity release – but like any debt arrangement, this comes with costs and risks. For retirees looking to shed debt and leave something behind for children and grandchildren, more borrowing is not the answer.
Releasing your capital
While downsizing your property can help increase your accessible wealth, it needn’t be a compromise when it comes to investment growth. The extra capital released can be reinvested in alternative investment structures that are more tax-efficient for Portugal while offering more flexibility. Ask your adviser, for example, about arrangements that let you take a regular income or hold investments in multiple currencies.
It also needn’t be a compromise for space. Once children have flown the nest, a smaller home may suit your needs better – especially when it comes to expenses – and still be big enough for the family to visit.
Unlocking capital from UK property
Many expatriates who are resident in Portugal do not realise they can benefit from tax exemptions on the sale of UK property.
If you are registered as a ‘non-habitual resident’, you can sell UK property without attracting capital gains tax here at all. For other Portuguese residents, only half the gain is liable at the usual income tax scale rates.
You would still be subject to UK capital gains tax when selling British property, wherever you are resident. However, non-UK residents are only charged on the gain from April 6, 2015. You could also qualify for ‘private residence relief’ for any tax years in which you spent 90 or more days in the property.
The longer you hold on to UK property before selling it, the more it can cost in UK capital gains taxes as house prices increase over time. You could also potentially miss out on the window of opportunity for the tax exemptions currently offered through the non-habitual residency (NHR) scheme.
Reducing taxation
Wherever your home is, stamp duty and capital gains tax charges generally increase with the property’s price tag, and higher-value homes can also tip you over the threshold for wealth tax. Portuguese property, for example, attracts annual wealth taxes of between 0.4% and 1% if valued over €600,000 (€1.2 million if jointly owned), regardless of where you are resident.
Wealth tax rates seem relatively low, but when applied to property values, this can add thousands to your tax bill. Reducing the amount of tax payable can help make your money go further in your lifetime and maximise the value of your legacy.
While you want to make sure your family are financially secure after you are gone, do not forget your own needs. Take personalised, professional advice to achieve a diversified portfolio to suit your unique aims and circumstances. Done with careful planning, downsizing your home could find the balance between securing a comfortable retirement today and a sizeable legacy for future generations.
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.
By Adrian Hook
|| features@algarveresident.com
Adrian Hook is a Partner of Blevins Franks and has been providing holistic financial planning advice to UK nationals in the Algarve since 2007. Adrian is professionally qualified, holding the Diploma for Financial Advisers.
www.blevinsfranks.com
