Algarve Accent

Buying a holiday home in the Algarve is a great idea, but actually living there is even better. Jason Porter, of international financial planning firm Blevins Franks sets out why it could prove to be the best move you will ever make

Like many couples from the UK, John and Emily, were considering retiring to the stunning Algarve, where they had already purchased a villa near Vilamoura, using capital from an inheritance.

They were aware that Portugal had attractive tax rules for new arrivals, called the Non-Habitual Resident (NHR) tax regime, but were unsure how they could benefit from these reliefs.

Blevins Franks explained this was particularly beneficial for retirees as it exempts certain foreign-source income, including pension income, and interest and dividends from taxation in Portugal for 10 years.

This coincides very effectively with the UK’s own ‘pension freedoms’ which allow you to ‘drawdown’ pension capital gradually, or take the pension as a lump sum.

John has two self-invested personal pensions (SIPPs) and a Defined Benefit (DB) Scheme, whilst Emily has a SIPP and a government pension, and they are both interested to know how it worked.

As they would become Portuguese tax residents, Portugal would have the taxing rights on John and Emily’s SIPPs and his DB scheme, according to the Double Tax Treaty. This means there would be no tax to pay in the UK, and NHR means no tax in Portugal. It should be noted Emily’s government pension will always remain taxable in the UK.

The UK Principle Private Residence (PPR) reliefs mean under normal circumstances, there would be no UK capital gains tax liability on the sale of the couple’s main home in the UK.

If John and Emily chose to leave the UK prior to selling their property there, then Portugal’s main home reliefs would also come into play. Not as generous as the UK’s, complete exemption only occurs on a full reinvestment of the proceeds in a new main home. As they intend to live in what was their holiday home, without any other reliefs, the gain is potentially liable in Portugal.

One of the benefits of NHR is that the gain is exempt in Portugal if the gain is taxable in the UK. The UK PPR exempt periods of occupation normally mean no tax is payable, but this does not mean there is no potential tax liability. As such, no tax should be due in the UK, and NHR means no tax is due in Portugal.

John could retain his investment fund portfolio, as NHR will mean no tax is due on the UK interest and dividends in Portugal. From a UK perspective, once they leave, the same income would be classed as ‘disregarded income’, which would not generate a tax liability.

The couple also have the option to plan for their long-term future in Portugal and use an offshore life assurance policy, as a tax efficient investment wrapper in Portugal. This would enable them to defer any tax on interest, dividends and gains to the point they decided to make a withdrawal. Even then, the taxable element is considerably less than the whole ‘profit’ accrued, and the tax rate reduces once the policy has been held for five, and then eight years.