Are you buying or selling a property in Portugal? Whether you’re buying your first home here, downsizing, or moving out of the country, it’s important to understand the Portuguese rules for taxing capital gains on the disposal of property.
The amount of tax you pay will depend on whether you are a resident or selling under non-habitual resident status, and whether you qualify for rollover relief.
Portuguese residents
Residents are subject to Portuguese capital gains tax on worldwide real estate gains.
Only 50% of the gain is taxable, and after owning the property for two years, you qualify for inflation relief. Assets acquired before 1989 are not taxed.
The taxable amount is added to any other income you earn that year and taxed at the income tax scale, currently ranging from 14.5% (for income below €7,479) to 48% for income above €78,834.
Principal residence relief – the rollover rules
When you sell a property that has been your primary residence, you may escape capital gains tax entirely depending on the circumstances and what you do with the proceeds.
Two exemptions are available (both can be claimed):
- Reinvestment in a new principal residence
The capital gain from the disposal of your principal residence in Portugal is exempt from capital gains tax if the proceeds (net of any mortgage taken out to acquire it) are reinvested in another principal residence.
- You must report the amount you intend to reinvest on your tax return for the year the property is sold.
- The new domicile must be located in the EU (obviously including Portugal) or in a country of the European Economic Area (EEA) which exchanges tax information with Portugal.
- You must buy your new home within 36 months of selling the first one or 24 months before, and live there within six months of the three-year limit. Otherwise, any tax payable will become payable (with penalties and interest). Reinvestment in the land to build the new house is eligible.
- All proceeds must be reinvested. This includes estate agent fees, legal fees and other incidental fees, so some tax is usually due.
- The property must be in your name and not in a company. It is advisable to have “the story” in it. For example, being registered as your address with the local authority, utility companies and on tax returns.
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Reinvestment in a long-term savings/retirement plan
Gains made on the sale of your property may also be tax exempt if you have reached retirement age and reinvest the proceeds in an insurance contract or pension.
- You (or your spouse/partner) must be retired or over 65.
- The proceeds of the sale are invested in a pension fund, a public pension system or an insurance contract within six months.
- When you reinvest in a pension, you must receive a maximum annual payment of 7.5% of the value of the funds (consult your accountant/lawyer to confirm that you qualify).
- Indicate your intention to invest the funds on your tax return for the relevant year.
- The property must be in your name.
Life insurance policies – where you can hold a wide range of investment assets in its tax-advantaged structure – are eligible for this relief.
If you are selling your home to buy a smaller, lower value property, you can invest the unused balance in a life insurance policy and benefit from the exemption.
Non-residents
Under current Portuguese law, non-residents who sell Portuguese property are taxed on the entire gain.
Individuals are taxed at 28%. Companies are subject to the Portuguese corporation tax of 25% while companies located in a tax haven are taxed at 35%.
If you reside in an EU or EEA state, you can choose to be taxed as a resident of Portugal. This only benefits people with very low incomes.
This situation is changing. The Portuguese Constitutional Court and the European Court of Justice have confirmed that this difference in treatment is discriminatory under EU law. Portuguese law has not yet changed, but the Portuguese tax authorities would already treat residents and non-residents the same.
Non-Habitual Residents (NHR)
Those with NHR status avoid capital gains tax liability on certain foreign source gains, depending on which country has the taxing rights under the double tax treaty. Where the gain is taxable in the country of origin – as with UK property – there is no liability in Portugal for NHR residents.
Gains are ‘exempt with progression’, so they are always added to your annual taxable income to calculate your effective Portuguese tax rate.
Tax planning
As is generally the case with taxation, what may seem simple at first turns out to be more complex in practice, so it is wise to take the personalized and professional advice of a local adviser. They can also recommend tax-efficient ways to preserve your assets and ensure your arrangements are right for you.
Tax rates, coverage and reliefs may change. All statements regarding taxation are based on our understanding of current tax laws and practices which are subject to change. Tax information has been summarized; the individual should seek personalized advice.
Keep up to date with financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
Par Sharon Farrell
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Sharon Farrell is a partner at Blevins Franks in Portugal.
www.blevinsfranks.com
