If you are non-resident for tax purposes, the tax applicable to your capital gain will be 28%. If, however, you are a resident, the tax will be levied only on 50% of the gain and you will be taxed according to the tax bracket applicable to your overall income.
Having said this, there are ways to mitigate this tax if you are Portuguese resident and this is your primary residence. Also one good reason why it can be highly beneficial for ex-pats to become Portuguese tax resident.
Re-investment of gains into another property
Capital gains tax is not payable if you sell your main home and reinvest the proceeds to buy a new main home in Portugal. This reinvestment can either be done 2 years prior to or 3 years after the selling of the property
Reinvestment of gains into a pension or insurance policy
Portuguese residents aged over 65 or if they are in a retirement situation can have their capital gains tax mitigated when reinvesting property sale proceeds into an eligible insurance contract or pension fund but the re-investment must occur within six months of the sale of the property to qualify. It is also possible to take 7.5% of the funds out per annum to supplement your income.
A case study
In 2010, David and his wife Jennie decided to retire to Portugal from the UK. They sold their UK family home and bought a villa in the Algarve as their principal private residence for €300,000. After 6 months in Portugal, they were conferred with Portuguese tax residency status.
Jennie passed away at the end of 2019 and David quickly found that the property was too big for him to manage alone. After discussing options with his financial adviser, David discovered that under the Portuguese Personal Income Tax Code article 10, n. 7, he could be exempted from paying capital gains tax if he re-invested some or all of the proceeds into an eligible insurance policy.
The property was sold for €1.5m. Approximately €600 000 was reinvested into smaller main home and this was therefore exempt from CGT. As David is a Portuguese tax resident, only 50% of the remaining gain was subject to tax and this could have given rise to a CGT liability . However, with the option to re-invest into a life assurance policy, David was able to take advantage of the reliefs and had no immediate CGT to pay. In order to qualify for the tax relief, the investment into the life assurance policy was made within six months of the property sale completion.
Advice from Blacktower Financial Management
Mitigating your exposure to capital gains tax, as well as other forms of taxation is vital for maximising your overall financial wellbeing. Our wealth management service provides a dedicated adviser to help you plan your financial strategy to achieve your present and future goals. We’ll work in partnership with you to identify the most appropriate investments and ensure you take advantage of all available reliefs. We will regularly review your position to help you achieve maximum return on your investments. For more information contact one of the financial advisers at our Algarve office.
Blacktower in Portugal
Blacktower’s offices in Portugal can help you manage your wealth to your best advantage. For more information contact your local office.
Manuela Robinson is the Associate Director of Blacktower on the Algarve. Blacktower has offices in Quinta do Lago and another in Cascais represented by Antonio Rosa.
Blacktower Financial Management has been providing expert, localised, wealth management advice in Portugal for the last 20 years. We can help with specialist, independent advice on securing your financial future. Get in touch with us on (+351) 289 355 685 or email us at firstname.lastname@example.org.