Britons moving to Portugal can potentially receive income such as UK pensions and UK dividends tax free for ten years under a special arrangement promoted by the Portuguese government. Personal Tax Manager, Gordon Wilkinson, explains why.
“When thinking about where you’re going to make your home, there are more important factors to consider than tax, but with increasing ease of global mobility we’d encourage entrepreneurs and retirees alike to keep their options open and to bring tax into the equation.
A move overseas is likely to be motivated by a lifestyle change or to soak up some sun in retirement, but for us as tax advisers Portugal is a favoured destination that offers wider appeal, as new residents have the opportunity to enjoy a decade of generous tax breaks through the Non-Habitual Residence tax regime (“NHR”).
The NHR was introduced in 2009 by the Portuguese government to attract wealthy individuals and successful businesses to the country by offering what is essentially a tax holiday during your first ten years living there:
- If employed in Portugal, non-habitual residents can benefit from a flat 20% rate of income tax on their earnings, which represents a significant reduction on both the UK’s [45%] and Portugal’s [48%] top income tax rates; and
- For entrepreneurs and retirees the NHR offers the opportunity to receive foreign income completely tax free.
Foreign income in this context means foreign to Portugal, which offers British expats some interesting opportunities, including:
- UK pensions – the tax treaty between Portugal and the UK gives Portugal exclusive taxing rights on most UK pensions (including private and company pensions but excluding government pensions paid by, for example, local authorities, armed forces, NHS and the like), but most income will not be taxed under the NHR meaning that you could benefit from 10 years of pension income completely free of tax; and
- Dividends from UK companies – these escape tax in Portugal under the NHR as they are taxable in the UK, however, in practice, special “disregarded income” rules can eliminate UK tax liability for those resident overseas. As a result, you could end up paying no tax in either country on dividends paid by UK companies, which could be of particular interest to entrepreneurs who have built up cash rich companies and who would now like to enjoy their wealth in a tax efficient way, or who would like to provide for their children and future generations in a tax efficient way.
The NHR is designed to attract new wealth to Portugal. Therefore, to benefit from the regime you need to become tax resident in Portugal and you can’t have been tax resident there before (or at least not in the previous five years). Currently, you can acquire Portuguese tax residence status by spending more than 182 days a year in Portugal, or by having your main home in Portugal.
If you’re currently tax resident in the UK, you will usually pay tax in the UK on your worldwide income and gains. To benefit from the NHR, you not only have to become Portuguese tax resident, but it is also necessary to cease to be UK tax resident.
UK tax residence is determined by the Statutory Residence Test and the amount of time you spend in the UK is a key factor in assessing your UK tax residence status. This is often a major concern for people contemplating a move overseas but spending a reasonable amount of time in the UK visiting friends and family does not in itself mean you will be considered UK tax resident.
Each individual case must be assessed on its specific circumstances, but it is often possible to make annual visits to the UK of up to 90 days without becoming UK tax resident. Indeed, in some circumstances you can spend nearly half the year in the UK and still not become UK resident.
When thinking about tax motivated emigration, like all tax planning, the devil is in the detail. The NHR offers the opportunity to relocate to Portugal to benefit from ten years of tax-free income, but it is crucial to fully understand your position in the UK and in Portugal before buying your flight tickets.
One key point to keep in mind, particularly for the entrepreneur looking to benefit from the tax exemption on dividend income or to sell assets in a capital gains tax efficient fashion, is that you need to be confident of remaining tax resident outside the UK for at least five years. If this absence from the UK is not achieved, there can be a nasty sting in the tail on return, whereby HMRC can seek to tax certain income and gains arising during your period of “temporary” non-residence regardless as to whether you have been party to the NHR or any other similar regime during your absence.
Various jurisdictions around the world have beneficial tax regimes for new residents, even the UK if you have previously lived elsewhere, but Portugal’s NHR is of particular interest, not only because of the potential 10-year tax holiday but also because Portugal:
- Is easy to reach from Newcastle, with a three-hour flight time to Faro;
- Is part of the European Union, the Euro Zone and the Schengen area, affording freedom of movement throughout;
- Is politically and financially stable;
- Has a highly skilled and English fluent labour force; and of course
- Has a great climate with clean beaches and well-maintained golf courses!
As a firm we do not promote aggressive tax planning, but we recognise, more than ever, that our clients are globally mobile and may choose to live in “white listed” jurisdictions such as Portugal that, in the same way as the UK does, offer tax incentives to attract wealth and expertise that will ultimately grow the economy.
As with all aspects of tax, the treatment is always subject to change. At present, the Portuguese Socialists are pressing for a flat rate 10% tax rate to be introduced on foreign income received by NHRs and, although unwelcome, there would still be significant tax savings for many.
We have clients in all corners of the world and consequently have great expertise when it comes to determining and advising on UK tax residence status and the tax implications of spending time overseas. In addition, we have some great contacts overseas and, specifically, in Portugal, as a result of several clients having relocated there or being in the process of planning to do so.
Whether your move is tax motivated or not, plans to leave or return to the UK should always have some tax input before you act, and we’d be delighted to offer our advice and guidance should you need it.