Living abroad to improve your tax status isn’t exclusively for those with super yachts. Much closer to home than Panama, Portugal has beautiful beaches, villages and weather. It also the potential for tax-free retirement income, unlike traditional European expat destinations, such as Italy and Spain. This is thanks to Portugal’s ‘non-habitual residency’ status.
What is it?
Portugal introduced non-habitual residency (NHR) status in 2009 to actively encourage wealthy people to relocate there. If you are working in certain industries or (even better) retired, this is aimed squarely at you. Eligible professionals within an industry considered scientific, artistic or technical in nature, benefit from a flat 20% income tax rate. Occupations include:
- Architects, engineers and geologists
- Actors, artists and musicians
- Doctors, dentists and psychologists
- Lecturers and teaching professionals
- Archaeologists, biologists and computer programmers
- Investment professionals
However, as things stand, the NHR status is especially attractive to retirees as most withdrawals from UK pensions taken as income or lump sums are completely tax-free in the first 10 years living there. Furthermore, under the Portugal/UK tax agreement Portugal has sole taxing rights and has also made tax-exempt:
- State pension
- UK Investment income such as interest, dividends and capital gains
- Overseas rental property income
It isn’t all good news; if you were in the armed forces, police force or were a teacher, your UK government pension does not qualify and will always remain taxed in the UK.
Am I eligible?
To be eligible for non-habitual residency you must first meet the usual residency requirements. These include spending at least 182 days a year in Portugal or it being your main residence. You don’t have to purchase property (which comes with its own set of considerations), renting a home is permitted under the regime.
Importantly, to qualify for NHR you cannot have been a resident of Portugal within the previous five calendar years.
Brexit and the future
Brexit is currently set for 29th March 2019. There is no denying that meeting Portuguese residency rules will be much simpler as an EU citizen, although NHR is available to any foreign national. For this reason, there is likely to be a surge in applications before the cut-off date. A potential backlog would slow the application process and is worth taking into account.
If you are legally a resident of Portugal at the Brexit cut-off, you should keep the right to stay and access the same benefits.
Aside from Brexit, following comments from the Portuguese Finance Minister in 2017, there was speculation that the Government may dilute some of the NHR benefits in the future by implementing a 10% tax on pension income. This has not happened and in fact, there was no mention of any NHR reforms in the 2018 Portuguese budget.
It is worth noting at this point, that even if the status is abolished altogether, it could not be removed from those already benefiting at the time. In short, if long hot summers and significant tax relief in retirement appeals to you, it’s time to investigate!