My experience of moving to Portugal and the associated tax benefits

My experience of moving to Portugal and the associated tax benefits

18:23 PM, 24th February 2023, About A year ago 5

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I have been asked to write an experienced based article on the benefits of moving to Portugal for portfolio landlord owners.

Whilst I lack the expert tax knowledge of the organisers of this forum at the moment, they have confirmed that I’ve been able to accurately summarise several of the key tax incentives of moving to Portugal.

The main conclusion is that I would urge anyone who is able to work remotely and does not have strong reasons to remain in UK to experience living in Portugal. Variety is the spice of life and there are so many great lifestyle opportunities with few or no downsides to moving a few hours flight south.

In particular, I would urge those who have larger portfolios of rental properties to seriously consider the financial benefits of moving to Portugal as these can be substantial.

The opportunities for those who have properties in personal name are either to dispose of the portfolio or to incorporate the portfolio and substantially reduce the existing liability to capital gains tax. The longer people have held the properties, the greater the reduction.

For those with incorporated portfolios, including those described above, the net rental income can be substantially enhanced.

In terms of timescale, one must consider a minimum of five years for this chapter of their life, though I have met none who have made the move and have any intention of returning after such a short period.

For those who are currently tied to UK, then it may be worth keeping this opportunity in mind for the future as an exit strategy for your investment.

Few would choose to make such a life-altering move for tax reasons alone. I have expanded on the tax opportunities later in this article but would like to start with the focus on the lifestyle reasons for such a move.

As a couple with a dog, we lived in a large house I had built to my own design in a chocolate box village in Leicestershire. The property portfolio took care of the income and we were comfortable. I don’t think I will ever be retired, but we had reached the point where work was mainly remote, flexible and sufficient to prevent boredom without encroaching on our leisure activities, which always took priority.

We own a large motorhome and regularly travel in it to enjoy the wider country.

Thinking back, it is hard to explain why we moved to Portugal. We had never been before. But a sequence of events caused reactions ranging from disillusionment to outright fear and brought me to the conclusion that enough was enough. There must be a better life elsewhere.

My memory of such events included the Brexit referendum, the rise of Corbynism and finally the pandemic. I felt the lunatics were taking over the asylum. What happened subsequent to our move including the political scandals of the summer and the outrageous situation in Autumn 2022, led me to conclude that I was right.

Early in the pandemic before the furlough announcement, fear gripped us all. I had reluctantly cancelled our trip to the Cheltenham festival 24 hours before. Later, I read an article in a national paper about a friend of my brother. He was a very fit and active man in his mid-fifties who went to that race meeting only to find himself on a life support machine a week later and being told to say goodbye to his family.

I could see a worst-case scenario of financial meltdown, even anarchy should this pandemic achieve what it appeared to be doing. I thought it would be very sensible to have cash in the bank to protect us, so I mentioned to our local estate agent that we would be open to viewings should he have anyone interested.

Whilst matters stabilised thereafter and the prospect of financial armageddon subsided, the wheels were in motion. I was receiving offers up to £100k over my asking price and sentiment to sell the property remained strong. At that point we had not considered where we would move to. I remember favouring Dorset as a place to consider.

By Autumn we had a firm buyer and the stage was set for exchange of contracts early in the new year. We decided we would put belongings into storage and take off in the motorhome to seek places to live. By now the better climates of Southern Europe were becoming very appealing. Not having experienced Portugal, for some reason it kept nagging at me as a possible favourite. I had experienced the Costa Do Sol on numerous golf trips and hated the overdevelopment and British expat culture that I had found there.

It appeared to me that people just wanted their egg and bacon cafes, English pubs, Sunday roasts and huge satellite dishes to watch UK soaps in the sun. Most could not even pronounce “cerveza”.

The stage was set to arrive prior to the Brexit deadline and then obtain residency. Whilst it seemed an extreme plan, given we had never set foot in the country, the solace was that everything was reversible and the house was not yet committed to sale. I arranged to rent a comfortable villa towards the western end of the southern coast of the Algarve and we set off in the motorhome armed with wads of forms required by covid restrictions in France, Spain and Portugal. We also took two huge bags of Yorkshire tea!

The four day journey via Caen in France was surreal. Europe was locked down and the roads were empty. Campsites were deserted. In some cases we just parked up outside the locked gates.

With an impending feeling that we must be mad, we pressed on through the Pyrenees and into Spain. There was that euphoric moment as we approached Seville in bright sunshine with strong radiant heat and stopped to buy oranges from a roadside seller. From that moment our UK home seemed a distant memory and any doubts or desires to return were extinguished.

Portugal air is not that warm in the winter, but every day the sun shone you could enjoy the radiant heat in a tee shirt. Walking the dog on the beaches or sandstone cliffs, marvelling at the blue Atlantic and the sea stacks, enjoying the spring flowers in the middle of winter, we were basking in the honeymoon period of our new life. With three hundred days of sunshine annually, rain and cloud come as a surprise, but rarely do either last all day.

Being a tourist destination the first thing that was apparent by comparison to UK was the vast amount of leisure opportunities.  All the water-based activities, cyclists going through the hills, hikers, skydivers and paragliders. Golf courses are everywhere. The countryside with rich diverse agricultural use in the valleys that wind down from the mountain in the near distance. This appeared to be an adult playground.

Despite being winter and covid we could eat out in such a choice of restaurants that we are still discovering great new places two years later. I think what surprised me the most was the lack of negatives. The supermarkets are large, modern and well-stocked. The internet is faster than UK. The mobile network was 5G before the UK. The time is the same. Despite the reputation of service provision, we would normally discuss a purchase or a service provision and have to decide which day that same week they would deliver.

The online banking was excellent, the road tolls were electronic, you could even park at the side of the road and a phone app would take the payment, allowing you to extend the time period from your restaurant table if delayed (a common occurrence).

Restaurant prices range from ridiculously cheap if you choose the three-course set lunch with a coffee alongside local workers to eye-wateringly expensive in the Michelin-rated hotel restaurants with everything in between available. Being Atlantic, fish and shellfish are fresh and locally caught or farmed, unlike the Med. I can buy oysters directly from the shacks at 4 euros a kilo. We generally take a weekly trip to the organic market for misshaped fruit and veg with flavour. The wine in Portugal is superb and inexpensive. It is available in three colours, red white and green.

Healthcare was a concern to my wife, but that was well catered for. A private insurance which costs us 100 euros a month each ensured we had 24-hour online access to a GP with wait times of less than 5 minutes and e-mail prescriptions. The local private hospitals are available within the insurance coverage.

We were also surprised by the number of younger people with school-aged children who had made the move. International schools existed, though many parents opted for local schools for the benefit of integration and, perhaps, cost.

When we arrived the ex-pat community was UK dominated, but this has changed in a very short time. People have been pouring in from throughout Europe, America, South Africa and further afield. English is spoken as an international language.

Once the house in UK sold, my wife set out to look for a home to buy. I was keen to wait for the pound to strengthen from its position at 1.15. How wrong was I? It did peak at 1.21 but then the lunatics really did take over the asylum!

We found a number of houses after a three-week concentrated effort of viewing and made offers on four. With a pre-programmed negotiation plan, we got a bite at our second offer and two weeks later had exchanged contracts on an elevated villa with panoramic ocean views, five minutes drive from the towns of Lagos and Luz.

My wife is blessed with good intuition. 18 months on, the house is worth at least 30% more than we paid. A combination of buying during lockdown when there were few buyers and the subsequent inpouring of foreigners looking to move to the coasts – because they can! The covid forced experiment of remote working had proven a great success and, as the lockdown gates were opened, there was an instant market of tens of thousands heading to the coasts to experience their new Zoom-liberated lifestyles.

Running UK businesses from Portugal is without a great hurdle. I now note that I ran my business remotely when in UK even though the nearest property was 15 minutes away. My wife has a staffed beauty aesthetics clinic in UK and she manages it from the Algarve.

The Algarve is popular for its warmth, particularly in winter. I would steer younger folk to the coastal towns bordering Lisbon which is the action city of Europe. A favourite city of many. Whilst the country retains its catholic roots, the liberalism we experience should not cause concern to any minority groups, who would feel equally welcomed in Portugal compared to UK. People emigrate to all regions of the country, some favouring hands-on rural living, some living in yachts or campers. As with any country, there are considerable cultural differences between rural and city living. After five years of residency, Portuguese citizenship is available for those that choose to learn the basics of the language.

If there are any detriments to report, it would be the lack of central heating. Houses are generally heated by log fires or pellet burners combined with wall-mounted aircon units. We have installed infrared radiators which are very good. However, the practice is to heat the rooms you occupy and not have a constant temperature throughout the house that gas central heating provides in UK.

Resultant of this, dampness and mould are prevalent in many buildings and certain works may be required to remedy this. Solar power is taking off as it becomes more affordable, so the electric bills can be contained to reasonable levels. The development of bi-directional car battery technology is likely to be a future game changer.

The other detriment comparative to the Med is the sea is cold. 19 degrees is the norm in the summer. Whilst pools can be pushing 30 degrees, swimming in the sea is for the brave, many of whom do so throughout the year.

The main summer is hot. Perhaps too hot. During the school holidays we take off in the motorhome to explore other areas and find cooler air. Many rent out their homes in the high season as the nightly rates are very attractive indeed.

It is a common debate whether residents prefer the winter or summer in Portugal. There are pros and cons to both. During the winter, walking is much better, dogs can go on beaches all day and people you meet are unlikely to be tourists so you can develop friendships. Spring arrives in December and the natural beauty enhanced by the migrating storks and flamingos is best enjoyed in the winter months.

Finally, I should mention friends. As with any area that attracts newcomers, people are very open to new friendships. There is an opportunity to socialise everywhere. Live music in bars and many long lunches in restaurants. Golfing societies, hiking groups, and dog walking groups. The list is endless. In addition to this, you may find your UK family and friends visiting you more often than they did in UK!

I state with honesty that the factors that resulted in us living in Portugal were not driven by tax advantages before I arrived,  I was actually only vaguely aware that advantages existed without being clear if they applied to me. However, the icing on the cake is that those advantages can be substantial, particularly for those with income from UK limited companies. In the next section I will outline the main advantages as I have found them.

Moving to Portugal – The tax advantages

Having described how moving to Portugal has enhanced our lives significantly, the following describes the icing on the cake which, for many, could be the driving force of a lifestyle change.

To disclaim the following, this article is based on my experience and research. I am not a tax professional (yet) and will almost certainly omit nuances and opportunities that could make a substantial difference to any reader’s individual situation.

The opportunity to move to Portugal and reduce your tax bill starts with obtaining residency. There are numerous options of visas, the most popular being a D7 visa.

Gaining residency is a process that will result in success if you meet the criteria. It can take a number of months.

As a resident, it is necessary to spend 183 nights per annum in Portugal. If you are not prepared to do this then it is not worth pursuing.

Once one has obtained residency a few clicks on a website qualifies you for a ten-year new residents tax concession known as NHR.

For easy understanding, the tax rates in Portugal differ between NHR and non-NHR.

It is not possible to have tax residency status in UK and Portugal simultaneously. Being a Portuguese resident is not the same as having Portuguese tax residency status. By virtue of your circumstances and behaviour you could either be a UK tax resident or a Portuguese tax resident in any tax year. In reality you may be a tax resident of both UK and Portugal under the tax rules of both countries but the double taxation agreement will then define which country your tax status applies to.

But the vast majority of Portugal residents have Portuguese tax residency status, so the following focuses on that category of person.

It is necessary that you are advised to ensure you fall into this category of person. One of the main factors is to have a habitual home in Portugal and not in UK (renting your UK home achieves this).

The basic understanding of tax status is that your total tax liability is calculated based upon Portuguese tax rules. Some classes of UK income are first taxed by HMRC under UK rules. Where the Portuguese calculation on that income is greater, the difference of tax is paid in Portugal. Where Portugal tax calculation is lower than UK no additional tax is paid. In some cases the UK tax is zero. The Portuguese tax comparable under NHR is generally low or zero.

Tax on UK income for Portuguese residents with NHR

Pension drawing age:

UK pension drawings are not taxed in UK. In Portugal under NHR, they are taxed at 10%.

To optimise the opportunity, the 25% tax free lump sum should be drawn prior to obtaining Portuguese residency. The remainder of drawings will be taxed at 10% for the duration of NHR and at standard Portuguese tax rates thereafter.

UK Property rental income. 

This is taxed in UK utilising standard UK tax allowances and methods of calculation.

The NHR calculation will result in a lower tax rate, so there is no further tax to pay.

There is no tax advantage available.

UK Capital gains tax 

This is taxed in UK. However, the base valuation for the calculation is the value on 6 April 2015. If your properties were purchased prior to this date then savings are available. For those with longstanding ownership, this saving can be so substantial, that it is worth strategising Portuguese residency for the disposal of the portfolio.  Residency would need to be for at least five years to escape HMRC scrutiny. There is further opportunity to incorporate your portfolio after becoming a Portuguese tax resident. Whilst there is no immediate cgt to pay upon incorporation in any event (if utilising P118 services), the 2015 ruling means that capital gain prior to that date will be converted to directors loan rather than share capital and this provides much greater opportunity for tax free drawings and also IHT planning opportunities.

Dividends 

Now it gets interesting:

Dividends are taxed in UK, but due to incomprehensible disregarded income rules, the tax rate in UK is zero.

Dividends in foreign income are tax-free under NHR.

If your portfolio is in a UK Ltd company then your company pays UK corporation tax, but the dividends thereafter are free of tax to Portuguese residents under NHR.

Interest charged to Ltd companies.

This is where interesting becomes exciting:

Most UK property portfolio companies are funded by director loans. Interest of 15% plus can be charged on these loans which reduces corporation tax. Possibly to zero.

Normally companies should pay withholding tax on interest payments, but exemptions can be obtained from HMRC.

Interest earnings from overseas for Portuguese residents are taxed in Portugal and are tax-free under NHR.

Summarising the above: –

  • A person with all their UK properties held in UK limited companies with sufficient director loan balances and no other income can live for ten years in Portugal tax-free.
  • A person who has held properties in their own name where they were purchased long before 2015, can save considerable CGT by disposing of their portfolio during the first ten years of becoming a Portuguese resident.
  • A retiree can save substantial tax on pension drawings for ten years by becoming a Portuguese resident.

There are caveats and potential traps, such as the residency status of your UK limited company. Those who are keen to pursue these opportunities must take professional advice from the right people.

Expat mortgages in UK are more expensive. A review of your funding is worth undertaking prior to changing residency.

SDLT in UK is higher for ex-pats. Consideration should be given to this if you are actively investing.

But with good preparation, you do not have to pay fortunes to live in faraway tax havens to substantially protect your wealth. You can simply fly two and a half hours south without adjusting your watch and enjoy 300 days of sunshine a year, or at the very least 183 sunsets.

Those inspired to make a move would be well advised to join my UK property group, Unity. We have live zoom sessions weekly. There will be many questions regarding making such a move and I would be on hand to assist via the Unity group.

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Comments

Anthony Hawes

8:53 AM, 25th February 2023, About A year ago

Great article Rupert. A particularly inspiring read for somebody like myself as a long-term landlord who has been visiting Portugal for nearly twenty years (since buying an apartment there) . My wife and I have been looking to make a similar move for the last four or five years. Maybe 2023 will be the one.

Rupert Chapman

13:09 PM, 25th February 2023, About A year ago

Reply to the comment left by Anthony Hawes at 25/02/2023 - 08:53
As you will gather from my experience, my attitude is dont overthink it, just do it! With regards to your planning, it is worth having a chat with tax experts before you commit. Consider your pension and your UK house plans in particular. Also check your mortgage termination dates and extend your mortgages before you make the move.

Mark Alexander - Founder of Property118

16:01 PM, 25th February 2023, About A year ago

Reply to the comment left by Rupert Chapman at 25/02/2023 - 13:09
You nailed it with your “over think” comment Rupert. I know loads of people who do that and continue to moan for the rest of their lives about politics, weather, tax, service, roads and so the list goes on.

13:12 PM, 27th February 2023, About A year ago

As summer in the Algarve is just too hot for us, we moved to the Silver Coast, an hour north of Lisbon. I moved in 2015, hubby followed 2 years later. We had planned to stay for 10 years but wild horses wouldn't drag us back now.

There are downsides, animal welfare is very poor here. It's a never ending job for the people I've met here rescuing, rehabilitating and trying to rehome myriad cats and dogs. Most of my UK tenants, and their relatives, now have a Portuguese dog! It's difficult to develop a thick skin.

Getting tradesmen to turn up in the right week never mind the right day is nigh on impossible. You spend days waiting for someone to arrive and they never answer their phones.

Financial advice: almost every accountant will tell you they understand the UK tax system, and NHR. They don't. Many friends have found themselves in hot water, and lots of debt because of this. If you don't have NHR be aware HMRC send the tax authorities here only details of your gross income. Trying to get them to believe you have loan payments, repair costs etc is extremely difficult. And as the tax year runs Jan-Dec there are always arguments when try to explain, when you apportion your tax here.

We have friends moving back to the UK this year as the constant attention from the tax authorities- turning up at their home at 8am on Sunday mornings - has finally become to much for them.

We love central Portugal but there are lots of downsides. We're in the process of selling all our UK properties while DH has NHR to cut financial ties completely. It's too complicated.

Rupert Chapman

8:50 AM, 1st March 2023, About A year ago

Those living in Portugal or moving there may be interested to join a facegroup group I run for UK landlords.

UK Property Landlords in Portugal

https://www.facebook.com/groups/627456379173749/?ref=share

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