How much Portugal capital gains tax will you be liable for when you sell a property? Residents are liable to tax on their worldwide property but only on half the gain – 50% is tax free. You may also be eligible for one or both of exemptions available.
Are you buying or selling a property in Portugal? Whether you are buying your first home there, or leaving the country or selling a holiday home, or perhaps downsizing, it is important to understand the Portuguese capital gains tax rules on the disposal of property.
How much tax you pay will depend on whether you are resident in Portugal, or if you are selling while under non-habitual residence status, and also on whether you can benefit from the roll-over relief.
Capital gains tax for Portugal residents
Residents are subject to Portuguese capital gains tax on their worldwide real estate gains.
Only 50% of the gain is taxable. If you have owned the property for two years, you are eligible for inflation relief.
The taxable amount is treated as income. You add it the other income you earn in the tax (calendar) year in which you sell the property, and you are taxed at the scale rates of income tax. For 2023 income, the rates are:
If you acquired the property before 1 January 1989 it is not liable for capital gains tax.
Main residence reliefs – the rollover rules
When you sell a property that has been your main home you may escape capital gains tax completely depending on circumstances and what you do with the proceeds.
There are two reliefs available: for reinvesting the proceeds into a new main home, and for reinvesting in a long-term savings plan or pension. Both reliefs can be claimed, which could be beneficial if you wish to downsize your home.
Reinvestment in a new main home
The gain on the sale of your main home in Portugal is exempt from capital gains tax if the proceeds (net of any mortgage taken out to acquire it) are re-invested in another main home.
To qualify, you must declare the amount you intend to reinvest on your tax return for the year in which the property was sold.
The new home must be in the EU (including obviously Portugal) or a European Economic Area (EEA) country which exchanges tax information with Portugal. This relief therefore no longer applies when selling your Portugal home to move back to the UK.
You need to purchase your new residence within 36 months after selling the first one or 24 months before. You (or your immediate family) must then live in the property within six months of the end of the three-year limit. If you don’t meet these time limits, any tax payable as a result of the shortfall will become due – together with penalties and interest for late payment.
Reinvestment in land on which the new main home is to be built also qualifies (within the above time limits). The building work must commence within six months of the end of the three-year limit and you must apply to register the property within two years after building works commences and move in within five years of completion.
The entire proceeds must be reinvested. This includes estate agent fees, as well as legal and other incidental costs, so some tax is always likely to be payable. The only legitimate expense is mortgage interest.
The property must be in your name, and not in a company.
It is advisable to have ‘history’ in the property. For example, ensuring it is registered as your address with the local authority and utility companies, and submitting tax returns from that address.
Reinvestment in a long-term savings plan / pension
Besides the main home exemption, the gains made on the sale of your property may be tax free if you are of retirement age and re-invest the proceeds into an insurance contract or pension.
To qualify, you (or your spouse/partner) must be retired or over 65 years of age.
The sale proceeds, net of borrowing, are invested in a pension fund, state pension system or insurance contract within six months.
When reinvesting in a pension, you must receive a maximum annual payment of 7.5% of the value of the funds invested. Therefore first speak to your accountant or lawyer to confirm if you will qualify.
You need to indicate your intention to invest the funds fully or partially in your tax return for the year concerned.
As with the main home relief above, the property needs to be in your name.
Life assurance policies – where you can hold a wide range of investment assets within its tax efficient structure – are eligible for this relief.
Therefore, if you are selling your main home and do not wish to reinvest the entire proceeds into a new home (for example if you are buying a smaller, more manageable property), you can invest the unused balance in a life assurance policy and benefit from the exemption.
Capital gains tax on Portuguese property owned by non-residents
Under Portugal’s current law, if you are not a resident of Portugal and sell a property there, the entire gain is taxable.
- Non-resident individuals are taxed at 28%.
- Non-resident companies are subject to Portuguese corporation tax of 25%.
- Non-resident companies located in a tax haven are taxable at 35%.
If you are resident elsewhere in the EU, or in an EEA state with a tax information treaty with Portugal, you may opt to be taxed as a Portugal resident. Note, however, that you will have to declare your worldwide income in Portugal to calculate the marginal rate of tax that applies to the gain, so it only benefits those with very low income.
While this is how the tax regulation stands at present, the situation is evolving. Taxing Portugal and EU residents differently is discriminatory and in breach of EU fundamental freedoms. The Portuguese Constitutional Court confirmed that this different treatment is discriminatory, and this was upheld by the Court of Justice of the European Union, but the government has not yet changed the law. It has however been reported that the finanças (Portuguese tax authority) is already treating residents and non-residents in the same way, despite nothing in law requiring them to do so, but if you fall into this category speak to your Portuguese lawyer or accountant.
Portugal capital gains tax for non-habitual residents (NHR)
Those with NHR status avoid liability for capital gains tax on certain foreign source gains, depending on which country has the taxing rights under the terms of the double tax treaty. Where the gain is taxable in the source country – such as with UK real estate – there is no liability in Portugal for non-habitual residents.
Gains are ‘exempt with progression’, however, so are still added to your annual taxable income to calculate your effective Portuguese tax rate. So, although not directly taxable, the gain could increase your overall tax bill.
As is usually the case with taxation, what may initially appear simple turns out to be more complex in practice, so it is always a good idea to take personalised, professional advice from a local adviser or firm.
A specialist adviser such as Blevins Franks 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.
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