Recently, ex-Prime Minister António Costa announced the government had decided to end this ten-year tax break, stating it was now “a measure of fiscal injustice that is no longer justified”.

This regime is due to close to new arrivals from 31 December 2023. However, those already registered as NHR when the State Budget Law comes into effect will continue to benefit for however many years remain in their ten-year qualifying period.

In addition, those who satisfy the conditions for the regime on 31 December 2023, hold a valid residence visa, and register as NHR by 31 March 2024 will also qualify.

However following the resignation of Portugal’s PM it is unclear if the ending of NHR will go ahead but people are still being urged to apply as soon as possible amid the uncertainty of the future of the regime.

Starting the Portuguese visa application process now – a compulsory requirement since Brexit – is unlikely to produce a visa passport stamp before the end date, so for all of those who could be caught out by the speed of changes and those who plan on retiring there in the future, will Portugal retain its attraction?

Suffice to say, while NHR has been the overriding headline in attracting new arrivals, there remain many other factors – including other tax benefits – why UK retirees will continue to flock to Portugal in the future.

New tax regime

From 1 January 2024, a new limited preferential tax regime will begin, assuming Parliament approves it.  It is designed to attract professionals in certain scientific, teaching, and research areas, who will benefit from a reduced 20% tax rate on earnings from employment or self-employment.

Inheritance tax and gifts tax were abolished in January 2004, and while they were replaced with ‘Stamp Duty’ (a transfer charge of 10% on the value of assets received by the beneficiaries of the deceased), it is not payable where the beneficiary is the spouse, child or parent of the deceased. In effect, there will be no tax due in Portugal on the majority of transfers on death.

Wealth tax arises in various EU states. Portugal has no wealth tax, but does extend its version of council tax, to a charge on higher value property. No liability arises for a couple who own property worth less than €1.2m (£1.05m, $1.3m). Any value in excess of this amount is only liable at 0.7% a year.

Single life assurance policy

Perhaps most importantly for the retiree who will often rely on drawing down capital and investments to live off, Portugal provides significant tax benefits for those who use an investment vehicle known as a single premium life assurance policy, also known as a Portfolio Bond to hold their investments.

It is a form of life assurance contract, but where the life assurance is minimal (often only 1% more than the market value of the investments within the contract), but where the ‘life assurance wrapper’ enables the investor to obtain the significant tax benefits accorded to such investments in Portugal.

No tax liability arises if there is no withdrawal from the policy, but if there is, the tax due should be significantly less than if the investment portfolio was held personally.

As an example, and in very round numbers, if you invested €100,000, and in 12 months it was worth €110,000 by way of income and gains during the year, then you would normally pay tax on the €10,000. If the same investment was made via a portfolio bond, then no tax would be payable unless a withdrawal was made.

If you had living expenses of €11,000 and withdrew this amount, then tax is only payable on €1,000, as this represents the same percentage of profit as on the whole balance (roughly 10%).

Assuming the same figures, if the withdrawal is only taken after five years, only 80 per cent of the taxable element is liable to income tax, so €800 would be taxable. If it was after eight years, only 40 per cent is liable, so €400.

The rate of tax is either 28% or the scale rates, and you can decide annually which is the more beneficial, depending on other income in the year. Assuming 28%, a liability of €280, falling to €224 at five years and €112 at eight years, is a lot less than €2,800.

This investment vehicle should mean most retirees can continue to live very tax efficiently, without their overall wealth being reduced by wealth taxes, and managing to pass on the majority of their estate to their beneficiaries.

The weather, lifestyle and lower cost of living means Portugal will remain a desirable place to retire, and the ongoing benefits of its tax regime means UK nationals will continue to find they can minimise their tax exposure in several different ways.

This article was written for International Adviser by Jason Porter, director of specialist expat financial planning firm Blevins Franks

PM António Costa resigned earlier this week amid his involvement in a corruption case in which he is being investigated.

This has led the government’s legislative agenda to be put on the backburner which included getting rid of the NHR tax scheme.

Designed to attract wealthy investors to Portugal, it had been set to close to new applicants by the end of 2023.

However, following recent events this will no longer be happening which will come as a huge relief to many British expats residing in the country.

Those wishing to take advantage of the tax’s unexpected survival are still being urged not to delay in applying amid claims it could be short-lived due to pressure from both inside Portugal and the European Union, Portugal Pathways reported.

To read more on this topic, visit: Just 27% of NHR wealthy expats in Portugal prepared for financial future beyond 10 years

Aziz, NHR tax advisor in Lisbon who is part of Portugal Pathways, said: “Because the current government has resigned, its legislative programme which was due to be approved in parliament has to be declared null and void.

“Which means the proposals to end the NHR tax regime are dead in the water too. But probably not for too much longer.

“By the time things have settled, I think we’ll be well into 2024. However, I think it would be a surprise for the NHR tax scheme to survive under a new administration, so while it may be extended perhaps up to the middle or end of 2024 I would urge anyone looking to take advantage of the tax scheme to act fast.”

Steve Philp from Portugal Pathways, added: “We’ve gone from a mad dash to get NHR and, separately, visa applications in by the end of the year to a bit of breathing space. But we think it will probably be just that.

“We would advise anyone looking to take advantage of the NHR tax regime to act now. Get advice, but don’t think you can wait six months because the chances are the NHR tax benefits will still close to new applicants at some point in 2024.

“The sooner you can get the ball rolling the more confident you can be in terms of your financial and life planning.

“We have seen incredible pressure on the professional supply chain from law firms, tax advisors, NHR and visa specialists, wealth management and real estate companies. This is unlikely to change at least in the short term as more and more people see the opportunity that was thought lost with the old deadline.”

This means thousands of expats living in Portugal could be caught out by the soon-to-be scrapped NHR tax regime.

On 10 October 2023 the Portuguese government released its first draft review on how it will look to end the NHR tax regime in 2024.

It suggested that new applicants need to apply before 31 December 2023 and complete the application by 31 March 2024.

While current affluent expats with NHR tax status will keep their benefits for their entire 10-year term, they are being urged to plan for the end of that period to avoid progressive tax rates.

For more on this topic, visit: Portugal set to u-turn on golden visa axe?

David Vacani chief executive of Beacon Global Wealth Management and chairman of FEIFA, said: “Many affluent expats are too busy enjoying the fabulous lifestyle Portugal offers that they forget to plan ahead.

“We have always advised people that it’s never too early to start looking at what happens after the 10-year perks expire.

“If you take action within the first two to three years, you can end up paying a much lower tax rate over a prolonged period of time.

“Even if you are entering the last years of the NHR tax scheme, you still have time to take steps – but we would strongly advise you act sooner rather than later.”

At the same time, many look longingly towards a holiday home in sunny southern Europe, or even something more permanent as a means of escaping ever higher capital taxes in the UK, or the threat of a dreaded wealth tax.

But what is the position in Europe when it comes to property? Would you be jumping out of the frying pan and into the fire, or is it much more of a benign situation? Let’s take a look at three countries the British tend to favour – France, Spain and Portugal – and see what the position is.

Whether capital gains tax is due will depend upon whether a property was occupied as the main family home. Each country has its own reliefs and allowances around the main home, but the UK rules vary considerably from those of the EU.

It is also important to realise that if the client has a property in a country that is not where they reside (eg, a holiday home or rental abroad, an old UK main home they may have retained after moving abroad, etc.), then they are likely to have to declare a sale in both countries, with the tax position decided according to the Double Tax Treaty (DTT) the UK has with each country concerned.

A DTT is designed to prevent double taxation, by only taxing the disposal in one of the two states, or taxing it in both, but allowing for the tax paid in one to be set off against the liability in the other.

The UK’s private residence relief (PRR) means that if the property was always occupied as the main home and sold within nine months of moving out, then no tax will be due. If this is not the case, then the gains are apportioned between qualifying and non-qualifying periods, with the non-qualifying potentially taxable (though other reliefs might reduce the taxable portion). The nine-month period of exemption has gradually been whittled down over the past nine years from what was 36 months in 2014.

Suffice to say, the simplest position is a sale of the UK home before leaving the country, meaning the situation in France, Spain or Portugal should not be an issue. If this is not possible or desired, then the local rules will also need to be reviewed on sale.

UK non-residents became subject to gains that accrue on UK residential property from 6 April 2015, but it is only the gain since that date which is potentially taxable. So, if the old UK home is retained beyond nine months, and until the individual is resident abroad, they will at the least have a declaration to make and may even have some tax to pay in the UK on disposal.

France

In France, main home relief applies if they have continuously occupied a property prior to sale. In addition, there is also a 12-month relief window if they leave the property but sell it within this period.

But main home relief in France is an ‘all or nothing’ relief; a second home in France could be occupied as the main home just prior to a sale and the full relief is given, while on the other hand a property that was the main home for decades could fall foul if it is not occupied at the point of sale or within the last 12 months.

The latter could occur where they have chosen to retain the old UK main home beyond moving to France.

Residents of France pay tax at 19% on gains on property. There is an additional tax (2%, rising to 6%) on property capital gains exceeding €50,000 (£43,000, $55,000). Social charges of 17.2% also apply to all property gains (though this may be reduced to 7.5% for UK nationals of state pension age), an overall rate of 36.2% or 26.5% (plus the additional 2% to 6% tax).

If there is tax to pay, this is reduced if the property was owned more than six years, with total exemption from capital gains tax after 22 years and social charges after 30 years of ownership.

Spain

In Spain, main home relief is only available where the whole proceeds are reinvested in a new main home, or the vendor is over 65 years of age.

But Spanish main home reinvestment relief has certain requirements which might prove tough to satisfy: they must have lived in the property they are selling for a continuous period of at least three years, they must have sold the property within two years if they have moved out, they must also buy a new main home within a period of two years of the sale and live in the new property for a continuous period of at least three years from the date of acquisition.

Even then the tax relief is only based on the proportion of the sale proceeds reinvested in the new home. If the new home costs more than the old home sold for, then the gain is exempt, but only reinvest half the proceeds and the other half is chargeable – quite a common scenario for UK nationals moving to Spain.

Depending upon the sums involved, it may just be simpler (and more beneficial) to sell the UK property prior to taking up Spanish tax residence.

In the case of UK nationals over 65 years of age living in Spain who had retained their former UK home, if they could sell this within two years of moving out, then this gain will be exempt if they are Spanish tax resident at the point of sale.

The same person would also be exempt on the subsequent sale of their main home in Spain if they had lived in the property for over three years and sold it before ceasing Spanish tax residency, with no need to reinvest in a new property.

Any chargeable gains are taxed at progressive rates between 19% and 28% on Spanish residents. The 19% band applies to the first €6,000, with the next €44,000 at 21%, and so on, with gains over €300,000 hitting 28%. Non-Spanish residents will be taxed at a flat rate of 19%.

Portugal

In Portugal, new tax residents can register as a ‘non-habitual resident’ (NHR) with the Portuguese tax authorities, which confers special tax treatment for ten years. For UK real estate, the UK/Portugal DTT says that property gains may be taxed in the country where the property is located. As the UK has taxation rights the gains are exempt in Portugal under the NHR regime for those ten years.

A UK national resident in Portugal would always be subject to tax on Portuguese real estate gains, and on non-Portuguese real estate gains once the 10-year period of NHR has concluded.

The gain on a sale of a main home in Portugal is exempt if the proceeds are reinvested in another main home in Portugal or elsewhere in the EU (as long as there is an exchange of information clause with Portugal regarding tax matters) within three years after, or two years before the date of disposal. As a direct consequence of Brexit, acquiring a main home back in the UK will not suffice.

Otherwise, residents of Portugal are taxed on only 50% of the property gain, as well as benefitting from inflation relief after two years of ownership. Taxable gains are added to other taxable income and taxed through the progressive scale rates rising from 14.5% to 48%.

All this seems to confirm that nothing is simple if they choose to keep their old UK main home after moving abroad, and the reliefs available in France, Spain and Portugal need some real disciplined planning to actually benefit from them. Careful review of the position is essential before they actually leave the UK and again before sale, less they find themselves with an unexpectedly nasty tax bill.

This article was written for International Adviser by Jason Porter, business development director of expat financial advisory firm Blevins Franks.