Purchasing real estate in Portugal? Six tax points to consider.

If you are looking for your dream home in Portugal, enjoy your search. There are so many great properties in fantastic locations that it can be difficult to choose. However, it is important to do your research and understand the tax implications of owning real estate and living in Portugal before making a decision. The more information you have beforehand, the more opportunities you will have to save on taxes.

Tax residency

If you plan to use your Portuguese property as a vacation home, be aware of the residency rules. You are usually considered a tax resident after staying 183 days in Portugal within a year, but this can happen earlier if you have a permanent home here - even on the day you arrive. Recognizing residency makes you liable for taxes in Portugal on worldwide income and some capital gains.

Purchase and local taxes

When buying Portuguese real estate you will be charged the Imposto Municipal sobre Transmissões Onerosas de Imóveis (IMT) property transfer tax. Rates vary depending on whether it is a main house or not, but in both cases the progressive rates are up to 8%. A levy of 8% (Imposto do Selo) is also charged. VAT is charged at 23% unless the property is purchased from a private individual. You will then have to pay the Portuguese equivalent of the UK property tax - Imposto Municipal sobre Imóveis (IMI) - at between 0.3% and 0.8% annually depending on the type, location and age of the property (7.5% if the property is deemed to be registered in a 'tax haven' jurisdiction).

The "wealth tax" of real estate

If the value of your share in Portuguese real estate exceeds €600,000, you will have to pay Adicional Imposto Municipal Sobre Imóveis (AIMI) between 0.4% and 1.5% annually, depending on the value and the way you own the property. The €600,000 per person relief means that married couples with joint ownership will only have to pay AIMI on properties exceeding €1.2 million and only on properties above that value.

Income tax on gain from sale of real estate

When selling Portuguese property, you may be subject to capital gains tax in both Portugal and the UK, depending on your residence. For Portuguese residents, your worldwide profits are added to your other annual income and taxed at a scale of rates that currently range from 14.5% to 48%. The taxable portion of the gain is only 50% and after two years of ownership, inflation mitigation is applied. If you use all of the proceeds from the sale of your primary residence to purchase another home within a specified time frame, your primary residence may be exempt from capital gains tax on the sale. This only applies if the new home is in Portugal or in the EU/European Economic Area.

Acquisition of real estate through the company

If you are considering buying Portuguese real estate through an offshore corporate structure such as a company or trust, carefully weigh the pros and cons to determine if this is the most appropriate approach for you. It does not provide tax advantages. As of 2018, if the value of the shares in a non-resident company is 50% or more of the value of the Portuguese real estate, the gain from the transfer of shares may be subject to Portuguese corporation tax at 25% (35% if it is a 'tax haven'). Real estate companies are not eligible for wealth tax relief, which means that many corporate owned properties are taxed at 0.4% of the entire value of the property annually.

Inheritance taxes

Take a closer look at what tax your heirs will pay when receiving real estate after your death or when gifting it during your lifetime. The transfer of Portuguese property to persons other than your spouse, children or parents incurs a flat tax of 10% of the value of the property, regardless of where they live. If you remain a UK citizen - as many expats do - your Portuguese property and worldwide inheritance will also be subject to 40% UK inheritance tax. With careful planning it is possible to significantly reduce your tax liability not only on your Portuguese home, but also on your worldwide assets, investments and pensions for you and your heirs. International tax planning is complex, so seek personalized professional advice to ensure you have financial peace of mind and fully enjoy your new home in Portugal. Tax rates, their scope and exemptions are subject to change. Any statements regarding taxation are based on our understanding of current tax laws and practices, which are subject to change. Tax information has been summarized; individuals should seek personalized advice. Keep up with financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com. Author Dan Henderson is a part