It’s easy to hold onto what’s familiar, and Britons feel comfortable with premium bonds and ISAs. But besides the possibility of improving returns, once you leave the UK the tax incentives provided by these savings in the UK fall away.
Is it worth keeping premium bonds?
Premium bonds feel part of the fabric of British savings – it’s likely your parents and grandparents owned some and your first bonds may have been a gift from them. Your capital is protected by the Treasury, which is comforting, and you have the enticing possibility of winning a million pounds (even if you know it’s an incredibly slim probability). Their tax-free status is also a compelling incentive.
Premium bonds were launched over 65 years ago, and today over 24 million people have a combined £124 billion invested in them. Every month, two lucky owners win the £1 million prize.
Does all this mean you should keep yours, especially if you own many Premium Bonds? As an expatriate, there are three issues to consider:
- Are you missing out on the opportunity to earn better returns? What are the chances you’ll win a big enough prize to make it a good investment?
- Do you have a UK bank account to deposit earnings in?
- How much tax will you pay on any winnings in Portugal?
Investment returns
A single bond costs £1. Each has an equal chance of winning a monthly prize. The minimum amount you can buy is 25 and the maximum is 50,000. Although they’re a form of savings product, whether you earn anything from them or not is essentially a gamble and down to luck.
Premium bonds do not provide any automatic interest earnings or capital growth. This means their value will be eroded over time by inflation, unless you happen to win big enough to compensate for inflation over the years you’ve owned them.
What are the chances of winning big? The ‘prize rate’ of premium bonds was reduced from 4.65% to 4.4% in March 2024. A feature in The Times explains that this equates to a one in 21,000 odds of winning anything from a single bond. The odds of scooping the £1 million top prize from a single bond in one draw is one in 59,082,205,208. Even if you own £50,000 in bonds, your chances of winning are one in 96,839.
Can expatriates own premium bonds?
Yes, you can, but it’s not that simple.
As the National Savings & Investments website explains, while they do have some customers outside the UK, you need a UK bank or building society account. It can only make payments to, or receive payments from, a UK account in your name.
The problem here is that, since Brexit, many UK banks have closed accounts belonging to EU residents because they don’t have the necessary regulation.
How premium bonds are taxed in Portugal
Premium bonds have always been tax free in the UK – but they are not tax free if you live in Portugal. If you win one of the prizes, you’ll share your good fortune with the Portuguese tax authority.
As a resident of Portugal, any gains you receive from premium bonds will be taxed as investment income. Portugal applies a flat rate of tax at 28% on investment income, though residents can opt for it be treated as general income.
Some expatriates mistakenly think that since premium bonds and ISAs are UK investments, they do not need to be declared in Portugal. In fact, they do, and with today’s global automatic exchange of information, your local tax authorities are informed about your UK investments. Make sure you declare everything correctly on your tax returns.
Tax-efficient wealth management in Portugal
There are tax-efficient investment vehicles available to residents of Portugal. With specialist professional advice, you could enjoy extremely favourable tax treatment on your capital investments. Speak to an adviser who can guide you on both UK and Portuguese taxation, the interaction between them, and tax planning opportunities.
Taxation is not the only reason to review your savings and investments. Consider whether they are suitable for your life in Portugal (for example, what currency should they be in?); your future expectations (will you stay here or return to the UK in future?); your objectives (are you looking for income or growth?); your time horizon and, importantly, your risk tolerance.
Too many people have portfolios built up over the years which are no longer suitable for them today. You need personalised advice from a Portugal based cross-border adviser like Blevins Franks which provides holistic advice covering investments, tax efficiency and estate planning.
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
