Portuguese capital gains tax – understanding the main home and reinvestment reliefs.
By Stephen Rankine, Private Client Manager, Blevins Franks.
https://www.blevinsfranks.com/portuguese-capital-gains-tax-property/
Will you have to pay Portuguese capital gains tax when selling a property? In Portugal, only half the gain is liable to tax and the main home is generally exempt. Portugal also offers a reinvestment relief for retirement age homeowners investing in savings plans and pensions.
When buying or selling property, you should always establish what the tax implications are. You are subject to the Portuguese capital gains tax regime if you are either a Portuguese tax resident selling a property anywhere in the world, or a non-resident owner of Portuguese real estate. The tax treatment is the same for local and overseas property and since January 2023 residents and non-residents benefit from the same tax treatment.
Portuguese property capital gains tax – the basic rules.
When you sell a property, only 50% of your gain is taxable. The other half is tax-free regardless of your circumstances. Inflation relief is available once you have owned the property more than two years. Property acquired before 1989, in Portugal or elsewhere, is not subject to tax at all.
The gains that are subject to tax are treated as income. They are combined with your other qualifying income for the year and your total earnings taxed at the scale rates of income tax. For 2024 income, these start at 13.25% for income up to € 7,703 and rise progressively to 48% for income over € 81,199.
If you have non-habitual residence (NHR) status, you may not have to pay Portuguese capital gains tax when selling property outside Portugal if the gain is taxable in the source country under the double tax treaty – this is the case with UK property. So this is a good opportunity to dispose of foreign property before your NHR 10-year term ends.
Main home reliefs in Portugal.
If the property you are selling has been your main home, you may be able to benefit from one or both of the two reliefs available:
1. for reinvesting the proceeds into a new main home (the ‘rollover rules’), and/or
2. for reinvesting in a long-term savings plan or pension.
Reinvestment relief when rolling the proceeds over in a new main home.
When you sell your main residence and use the proceeds to buy your new home, the gain is exempt from Portuguese capital gains tax, provided you meet the conditions. Your new home doesn’t have to be in Portugal, but it does need to be in the EU or EEA (European Economic Area).
The entire proceeds must be reinvested. This includes estate agent fees, legal and other incidental costs, so some tax is likely to be payable. The only allowable deduction is the mortgage used to buy the property.
The property being sold must be in your name (and not in a company) and you may need to demonstrate ‘history’ in it – having it registered as your address with the local authority and utility companies, submitting tax returns from that address, etc.
There are time limits that need to be met. First of all, you have to declare the amount you intend to reinvest on your tax return for the year in which the property was sold. Then you have to purchase your new home within 36 months and move in within the following six months. A home bought in the 24 months before selling the first one also qualifies. If you fail to meet these deadlines you will need to pay the tax after all, plus penalties and interest.
You can also reinvest in land provided you build your main home on it. Building work must start within six months of the end of the three-year limit, with the property registered within the following two years and a move in date within five years of completion.
Reinvestment relief for retirees investing in a long-term savings plan or pension.
If you are either retired or aged over 65 years, gains made from selling your main home may be exempt from tax if you re-invest the proceeds into an insurance contract or pension. In this case, you don’t need to reinvest the entire proceeds, but obviously only the amount reinvested will be spared tax.
This relief is in addition to the main home rollover relief above, so you can benefit from both. This is particularly helpful if you are downsizing and buying somewhere smaller at a lower cost.
Again, there are time limits. The sale proceeds (net of borrowing) must be invested in a pension fund, state pension system or insurance contract within six months, and you need to indicate your intention to invest the funds in that year’s tax return.
Note that when reinvesting in a pension, you must receive a maximum annual payment of 7.5% of the value of the funds invested, so first speak to your tax accountant to confirm if you will qualify.
Life assurance policies – where you can hold a wide range of investment assets within its tax efficient structure – are eligible for this relief. If you are selling your main home and do not wish to reinvest the entire proceeds into a new residence, you can invest the unused balance in a life assurance policy and benefit from the exemption.
Tax planning.
Taxation is always complex and it is advisable to take personalised, professional advice from a local adviser or firm before you make any final decisions.
A specialist tax and wealth adviser can also recommend tax-efficient ways for you to hold your assets, so that you do not pay any more tax than necessary and your arrangements are suitable for your personal situation and objectives.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individual should seek personalised advice.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
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