UK Tax Implications of Moving to Portugal
With reliable warm weather and a plethora of outdoor activities, and up until recently a very low-tax regime, Portugal is a popular destination for UK expats looking to make a move.
This article summarises some of the key UK tax implications of moving to Portugal, whether you are moving there for work, retirement or adventure.
Until the end of 2023, Portugal had the non-habitual residence scheme, but this has now closed so any new residents in Portugal will be taxed in a similar way to Portuguese locals. That said, Portugal has a double taxation agreement with the UK, which can open up some useful tax planning opportunities in the right circumstances.
1. Residency and Domicile Status
Your UK tax position largely hinges on your residency and domicile status. The UK employs a statutory residence test (SRT) to determine tax residency. If you spend 183 days or more in the UK in the tax year, you are considered a UK resident for tax purposes but if you spend less than 183 days in the UK during a tax year, your tax residency position is more complicated. Additionally, factors such as having a home in the UK, carrying out substantive work in the UK or overseas, and the number of ties you have with the UK can affect your residency status.
Getting your tax residency position right is absolutely critical to your exposure to UK, and getting this wrong can have a huge effect on your tax position in the UK.
Domicile status is another crucial consideration. Generally, you're domiciled in the country where you have your permanent home, but it's possible to be resident in one country and domiciled in another. Domicile status impacts your liability for Inheritance Tax (IHT) on your worldwide assets as well as potentially impacting the income tax & capital gains tax position for UK residents.
2. Income Tax
If you move abroad but continue to earn income from the UK, such as rental income from property, you may still be liable for UK income tax. Non-residents are taxed on UK-sourced income, but the extent of this liability can be influenced by double taxation agreements (DTAs) where applicable. DTAs are designed to prevent the same income from being taxed in both countries.
Conversely, UK residents are taxed on their worldwide income (again subject to DTAs and other reliefs in certain cases), so residency really does make a difference to your UK tax exposure.
3. Capital Gains Tax (CGT)
For non-residents, CGT is generally only payable on the disposal of UK property, with some exceptions. However, the sale of other assets, such as shares in companies, is usually not subject to UK CGT if you are a non-resident for a full tax year, but can potentially be taxed on you resume UK tax residence within 5 years. It’s crucial to plan property sales and understand the rules that apply to your specific situation, such as the Non-Resident Capital Gains Tax reporting requirements.
4. Inheritance Tax (IHT)
The UK levies IHT on the worldwide estate of individuals domiciled in the UK. If you retain your domicile status after moving abroad, your global assets remain liable for UK IHT. Planning and advice are essential, especially if you intend to change your domicile status, which can be a complex and lengthy process.
5. National Insurance Contributions (NICs)
Understanding your NICs obligation is essential, especially if you plan to return to the UK or claim a state pension in the future. You may be able to make voluntary contributions while abroad to maintain eligibility for certain benefits and the rate that you pay voluntary NICs depends on your situation.
6. Tax Reporting and Compliance
Staying on top of your tax reporting obligations is paramount. For example, you may need to file a UK Self-Assessment tax return if you have UK-sourced income. Proper planning and timely reporting can help avoid penalties and ensure tax efficiency.
Conclusion
Leaving the UK introduces complexities to your tax affairs, necessitating careful planning and consideration of your tax residency, income tax, CGT, IHT, and NIC position. Engaging with a tax professional who understands both UK and international tax law can provide invaluable guidance and peace of mind during this transitional phase of your life. By addressing these tax considerations, you can ensure compliance and potentially optimise your financial position as you embark on your new adventure, whether the move is temporary or permanent.
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Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.