Buying a property overseas is an exciting venture, but also one that requires careful financial consideration. To help ease the process, Chris White, Founding Director of boutique estate agency Ideal Homes Portugal, has compiled his top tax tips for buying property in Portugal.
Portugal has been called 'Europe's best kept secret' by PWC so far as individual taxation is concerned. This is due to a number of advantageous tax rules. It also offers some distinct advantages over other European countries when it comes to property ownership.
The first top tax tip from Ideal Homes Portugal is to consider the non-habitual residents scheme, which came into force in 2009. Under the scheme, foreigners who reside in Portugal and who meet certain criteria are exempt from paying tax on most forms of income from overseas, including pension income, for a period of ten years. This can make a vast difference to UK buyers looking to withdraw a lump sum from their pension in order to buy a holiday home in the sunshine - something that they would be taxed heavily on if they did it while resident in the UK.
Another tip is to think about to whom you plan to pass your property as part of your estate. For those wishing to leave their property to their spouse, descendants or ascendants, Portugal is the ideal location, as this will incur no inheritance or gift tax. It means that you can purchase your dream property - this three bedroom linked villa on a closed condominium with stunning golf course views, or a detached villa with its own pool, for example - and enjoy the peace of mind of knowing that future generations will also be able to enjoy it.
Capital gains tax can also be advantageous in Portugal when compared with other EU destinations, though it's a complicated issue and can actually become costly. Ideal Homes Portugal's Chris White explains,
"The amount of capital gains tax that you pay depends on your residency status. For properties purchased after 1989, residents of Portugal are taxed on only 50% of the gain they have made during their ownership of the property. And if they have owned the property for two or more years then they can benefit from inflation relief too. The gains are considered as income and taxed at the banded rate that is applied based on your overall income. The bandings go up a sliding scale to a top rate of 48%.
"However, there is an exemption for gains made from the sale of your main residence, provided you put the money back into another main home within three years."
There are certain other requirements relating to capital gains tax in Portugal and White strongly recommends, as with all taxation matters, obtaining professional advice.
His third tax tip is one of which many of those looking to purchase property in Portugal are unaware: namely that any income made by renting out your property when not using it yourself is subject to taxation in Portugal. Income from short term rentals is taxed at a rate of 25% on 15% of the income. So of €1,000 of income, €150 would be liable to taxation at a rate of 25%.
This means that even if you live in the UK and just rent your Portuguese property out to friends at "mates' rates" twice a year, you technically need to complete a tax return in Portugal for the duration of your ownership of the property. A double taxation treaty means that you will then not have to pay tax in the UK on the income from the property.
Finally, find out what the Immovable Property Tax (IMI) rate is in the area where you plan to buy. This varies from 0.3% to 0.5% depending on the decisions of the local municipality, the location of the property (rural/urban) and the last time the property was valued.
Overall, there are some significant advantages to buying and owning property in Portugal. Chris White concludes,
"Tax information in Portugal can be tricky and of course tax law does change from time to time, so professional advice should always be sought, but there are definitely benefits of owning property here when compared with owning in England or in other European countries. With the right advice, buyers often find that there are distinct advantages to buying their dream holiday home in Portugal."
For further details call Ideal Homes Portugal on 0800 133 7644 or +351 289 513 434, email enquiries@idealhomesportugal.com or visit www.idealhomesportugal.com.
