Offshore tax havens: PortugalBy Frank Schmitz • Feb 15th, 2010 • Category: Tax Issues
British expats will find surprising tax breaks from life in Portugal… especially in terms of capital gains tax and inheritance tax.
For example, capital gains arising from sale of shares owned for more than 12 months are tax-free.
Portugal evokes images of whitewashed luxury villas by the beach and championship-standard golf courses. Little wonder that it continues to be one of the more popular regions for UK expats.
Portuguese tax has its grey areas, which is why it is important to seek expert help – which could turn out to be beneficial. Take Trusts, for instance. There is no concept of these useful tax vehicles in Portugal – but that does not mean that you cannot take advantage of them.
Wrapping up your investments into an appropriate offshore life assurance bond can still provide significant tax benefits. The original capital can be taken out of the structure at any time, tax free, and tax only starts when you have taken out the starting capital. This assumes you do not have regular withdrawals, but ad-hoc irregular ones.
Withdrawals of income in excess of the original capital are taxed at discounted rates; after five years, only 60 per cent of the withdrawals is liable to income tax; after eight years, it falls to 20 per cent.
For example, on an initial investment of €100,000, assuming that €20,000 is withdrawn each year on an irregular basis, there would be no tax to pay in years one to five whilst the amount of the original capital is being withdrawn. In years six to eight inclusively, tax would only be payable on €12,000, and from year nine only €4,000 would be taxable each year out of the €20,000 withdrawn.
Capital Gains Tax
Investing in the stock market may be giving even the most hardened investors the heebie-jeebies but, over the long-term, history suggests that shares outperform all other asset classes. And when gains have been made, the capital gains tax regime is favourable. Capital gains arising from sale of shares owned for more than 12 months are tax-free. Otherwise, the tax rate is a favourable 10 per cent.
Unlike in Britain, where IHT is still an emotive subject, you could get away with paying no death duties whatsoever. IHT was abolished in 2004 for close family members such as spouses and children. Otherwise inheritance tax, which is now called Stamp Duty, is payable at a rate of 10 per cent – but only on assets situated in Portugal.
You can save €60,000 by careful tax planning. George, 60 and a widower, is about to become a Portuguese resident but remains UK domiciled for now.
The calculations below show how much tax George would pay were he to be taxed at the standard rates, and also how much tax he could save by investing tax-efficiently. If George were to be taxed on his income under the standard position his liability would be €87,244.72.
However, only 15 per cent of pension income is taxable 85pc is tax free (annuity treatment). Investment income: place investments in a tax wrapper – George can draw £800,000 tax-free, all gains and income roll up tax-free.
On this basis, he will have no tax on this income in Portugal for 20 years. Sell the UK house whilst Portuguese resident and in the UK tax year after departure – no Portuguese capital gains tax and no UK capital gains tax.
Invest in a tax wrapper, and extract original capital tax free, as above. Gift shares in the company to Discretionary Trust with no UK IHT (100 per cent exempt…Business Property Relief). The dividends can be paid tax free to Trustees, and tax free from Trustees to George.
With these changes his total total tax charges amount to €429.73 – a saving of €67,593.69.