Over the past 10 years, Portugal has become a very popular choice for expats worldwide due to its extremely generous tax regimes such as the Golden Visa and Non-Habitual Resident (NHR). And though these schemes are indeed attractive for those looking to relocate to sunnier climes with added benefits, they are by no means the only ways in which residents of Portugal can benefit from the current fiscal environment. There are also methods by which individuals can be exempted from paying Capital Gains Tax (CGT) which might ordinarily be payable after the sale of a property for example, assuming the property has indeed increased in value. As is often the case when families come to settle in Portugal, time passes in the happy family home until one day we realise that the property has become too big for our needs. Perhaps the children have fled the nest, or we simply want to take on a home with less onerous maintenance and upkeep requirements. The following example is based on a real-life client’s case, and illustrates the type of value that can be had from a relatively simple financial procedure.
In 2010, Harry and his wife Sandra (then aged 58) moved to Portugal from the UK to enjoy their retirement in the sun. As part of the move, they sold their home in Dorset and bought a villa in Cascais as their principal private residence for €300,000. Harry and Sandra both then went on to become Portuguese tax residents. Sadly, Sandra passed away at the end of 2019 leaving Harry alone in their property. Without Sandra, the family home was too big for Harry by himself so he decided to consider his options.
Along with his adviser, Harry researched the Portuguese Personal Income Tax Code article 10, n. 7 and learned that if he sold his villa and invested some or all of the proceeds into a life assurance policy, he could be exempted from paying capital gains tax (which varies between 14.5% and 48% - depending on the individual’s level of income). He also had the option of taking up to 7.5% (each year) of the capital invested in the life assurance policy to supplement his income. After some deliberation, Harry decided to sell his villa this year for €1.5m after finding a smaller and more suitable apartment for €600,000.
In order to qualify for the tax relief, the investment in to the life assurance policy was made within six months of the property sale completion. Harry received tax relief on both the purchase of his new home and also the reinvestment of the proceeds into a life assurance policy.
The gain for tax calculation on the principal family home was €1.170m which would have been subject to a tax rate of 48%. As Harry is tax resident in Portugal, only half the €1.170m gain is taxable – meaning a potential tax bill of €272,398.79.
However, by investing the proceeds in to a life assurance policy, there was no immediate tax to pay and Harry exercised greater control in deciding when to pay tax on his income in the future as well as leaving a legacy for his beneficiaries.
There are a number of factors which drive the decision to downsize your property – the need to release capital, a means by which to provide a supplement to income, or indeed as we´ve seen a major change in life circumstances. Through investing in a life insurance policy, a great deal of money can be saved long-term, and it´s certainly something that should be considered as part of your overall approach to wealth management. By speaking to a qualified, regulated, financial advisor in Portugal, we can advise you on the best way to protect your wealth according to your particular circumstances. It’s possible you could downsize your taxes along with your property.
Written by Antonio Rosa – Associate Director
Edificio Jomavipe, Rua Cesaltina Fialho Gouveia, 703, 2645-038 Cascais, Portugal
Phone: +351 933 787 898