Larger homes offer ample space for visiting family and friends, but, as the years go by, if you find your property begins to feel too large or demanding to maintain, downsizing to a more manageable property can be a smart and liberating step.
For many, property is one of their most valuable assets, especially when owning more than one. Over time, it can deliver a significant return on investment and serve as a meaningful legacy for family. However, there are also 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.
Compared to other investments, property can also prove costly to maintain. A larger property requires more effort to keep it in good shape, which may be more challenging in your later years. Running costs are also generally more expensive. Mortgage payments, rates, utility bills, building and maintenance expenses can all add up to generate a relatively high ongoing burden.
Affording retirement
Are your pensions, savings and investments on track to sustain the lifestyle you want throughout retirement? Are they structured to protect against long-term inflation and provide the increased income you may need in the future as the cost of living rises?
Many people find themselves in an ‘asset rich, cash poor’ situation, owning considerable physical wealth such as property but with substantially less disposable income.
While property can be a solid investment, it locks money away in a highly illiquid way. If you need access to your capital, you may not be able to sell easily, nor for the right price. Also, there is risk in tying your funds up in one asset class; if the value of property drops, so does your investment.
Benefits of reinvesting your capital
Downsizing property can help increase your accessible wealth, while still providing the opportunity for investment growth. By reinvesting in suitable investment funds, for example, you can still invest in real estate if you wish, but alongside other assets (equities, bonds etc.) to reduce risk through diversification. If you require small amounts of cash, you can just sell the amount you need, not the whole investment. It is also generally easier to reduce tax liabilities on capital investments than on real estate.
A financial adviser will help you explore investment arrangements that suit your circumstances, goals and risk appetite while being tax-efficient for Portugal. You could unlock other benefits, such as a regular income and currency flexibility.
Tax considerations
Portuguese property attracts annual wealth taxes of between 0.4% and 1.5% if valued over €600,000 (€1.2 million if jointly owned). Portugal’s inheritance tax (‘stamp duty’), however, is limited to 10% and spouses, descendants and ascendants are exempt.
When selling a Portuguese main home to reinvest the full proceeds into another, you are exempt from capital gains tax. If you are of retirement age, you can avoid Portuguese capital gains tax by reinvesting some or all of the gain from a main home into an eligible insurance contract or pension fund. When downsizing, you can benefit from both reliefs.
For other properties, only half of the gain is liable to Portuguese tax. Those who still have non-habitual residence status do not have to pay Portuguese capital gains tax when selling UK real estate, so bear this in mind before your NHR ends.
With Portugal offering highly beneficial tax opportunities for residents with capital to invest, it is worth reviewing your options.
UK property
Non-residents selling UK property are only liable to UK capital gains tax on gains made since 2015 (2019 for commercial property). The double tax treaty prevents you paying tax twice.
UK property is always liable to UK inheritance tax, regardless of how long you lived abroad. Once UK pensions become part of your estate in 2027, having both UK property and pensions could significantly impact your heir’s inheritance. Your Portugal home is only subject to IHT for up to 10 years after leaving UK.
Weighing your options
Choosing whether to downsize or sell additional properties is a significant decision, shaped by both lifestyle preferences and financial considerations. If you’re at this crossroads, understanding the tax implications can be a valuable part of the decision-making process.
A qualified wealth manager can compare the benefits of real estate versus capital investments. They’ll calculate your potential tax liabilities and assess income and growth potential, to help you build a tailored investment and estate planning strategy.
With expert advice, you can enjoy a secure retirement in Portugal while laying the foundation for a lasting legacy for your loved ones.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
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.
