In 2009, the Portuguese government introduced a unique tax regime for those who moved there. The non-habitual resident (NHR) regime is particularly attractive to retirees with substantial pension funds and/or investment income, as well as those in certain areas of employment or self-employment.
Recently, ex-Prime Minister António Costa announced the government had decided to end this ten-year tax break, stating it was now “a measure of fiscal injustice that is no longer justified”.
This regime is due to close to new arrivals from 31 December 2023. However, those already registered as NHR when the State Budget Law comes into effect will continue to benefit for however many years remain in their ten-year qualifying period.
In addition, those who satisfy the conditions for the regime on 31 December 2023, hold a valid residence visa, and register as NHR by 31 March 2024 will also qualify.
However following the resignation of Portugal’s PM it is unclear if the ending of NHR will go ahead but people are still being urged to apply as soon as possible amid the uncertainty of the future of the regime.
Starting the Portuguese visa application process now – a compulsory requirement since Brexit – is unlikely to produce a visa passport stamp before the end date, so for all of those who could be caught out by the speed of changes and those who plan on retiring there in the future, will Portugal retain its attraction?
Suffice to say, while NHR has been the overriding headline in attracting new arrivals, there remain many other factors – including other tax benefits – why UK retirees will continue to flock to Portugal in the future.
New tax regime
From 1 January 2024, a new limited preferential tax regime will begin, assuming Parliament approves it. It is designed to attract professionals in certain scientific, teaching, and research areas, who will benefit from a reduced 20% tax rate on earnings from employment or self-employment.
Inheritance tax and gifts tax were abolished in January 2004, and while they were replaced with ‘Stamp Duty’ (a transfer charge of 10% on the value of assets received by the beneficiaries of the deceased), it is not payable where the beneficiary is the spouse, child or parent of the deceased. In effect, there will be no tax due in Portugal on the majority of transfers on death.
Wealth tax arises in various EU states. Portugal has no wealth tax, but does extend its version of council tax, to a charge on higher value property. No liability arises for a couple who own property worth less than €1.2m (£1.05m, $1.3m). Any value in excess of this amount is only liable at 0.7% a year.
Single life assurance policy
Perhaps most importantly for the retiree who will often rely on drawing down capital and investments to live off, Portugal provides significant tax benefits for those who use an investment vehicle known as a single premium life assurance policy, also known as a Portfolio Bond to hold their investments.
It is a form of life assurance contract, but where the life assurance is minimal (often only 1% more than the market value of the investments within the contract), but where the ‘life assurance wrapper’ enables the investor to obtain the significant tax benefits accorded to such investments in Portugal.
No tax liability arises if there is no withdrawal from the policy, but if there is, the tax due should be significantly less than if the investment portfolio was held personally.
As an example, and in very round numbers, if you invested €100,000, and in 12 months it was worth €110,000 by way of income and gains during the year, then you would normally pay tax on the €10,000. If the same investment was made via a portfolio bond, then no tax would be payable unless a withdrawal was made.
If you had living expenses of €11,000 and withdrew this amount, then tax is only payable on €1,000, as this represents the same percentage of profit as on the whole balance (roughly 10%).
Assuming the same figures, if the withdrawal is only taken after five years, only 80 per cent of the taxable element is liable to income tax, so €800 would be taxable. If it was after eight years, only 40 per cent is liable, so €400.
The rate of tax is either 28% or the scale rates, and you can decide annually which is the more beneficial, depending on other income in the year. Assuming 28%, a liability of €280, falling to €224 at five years and €112 at eight years, is a lot less than €2,800.
This investment vehicle should mean most retirees can continue to live very tax efficiently, without their overall wealth being reduced by wealth taxes, and managing to pass on the majority of their estate to their beneficiaries.
The weather, lifestyle and lower cost of living means Portugal will remain a desirable place to retire, and the ongoing benefits of its tax regime means UK nationals will continue to find they can minimise their tax exposure in several different ways.
This article was written for International Adviser by Jason Porter, director of specialist expat financial planning firm Blevins Franks