Pre-move planning

Planning prior to leaving the UK puts you in the best position to take advantage of opportunities that would be lost after arriving into the Portuguese tax system. Key areas to consider include:

Individual Savings Accounts (ISAs)

For UK residents, ISAs are free from both income and capital gains tax. However, once you leave the UK, this tax protection no longer applies.

If aware, most individuals encash their ISAs before leaving the UK at 0% UK tax and then reinvest in new tax efficient investments after relocating. If you wait until you are resident in Portugal and then encash, capital gains tax would apply.

Capital gains tax allowances

As a UK tax resident, you can realise £3,000 of gains each year tax free. Portugal does not offer a similar allowance. With planning, it may be possible to take advantage of up to two tax years’ allowances (if unused) prior to departure, as well as any carried forward losses.

Pensions

The 25% tax-free pension commencement lump sum (PCLS) is only available to UK tax residents. After leaving the UK, any pension withdrawals, including the PCLS, will be subject to Portuguese taxation.

Property: main residence

In the UK we are accustomed to the concept of main residence relief, and you retain this relief when selling your former main home as a non-UK resident. However, selling the property while living in Portugal may attract Portuguese capital gains tax unless you qualify for certain schemes, such as IFICI (NHR 2.0).

Post move planning

Tax incentive schemes

New residents to Portugal may be able to apply for the new tax incentive scheme, IFICI (often referred to as NHR 2.0). This scheme offers tax free interest, dividends and capital gains arising from non-Portuguese sources, so can be very attractive from a tax perspective.

Unlike the original Non-Habitual Resident (NHR) scheme, eligibility is more restrictive and tied to specific occupations or business activities. Consulting an accountant is advisable to assess your eligibility.

Property: secondary or buy-to-let

While selling your main residence is often best done before relocating, selling investment properties post-move can sometimes offer tax advantages under the April 2015 valuation rules.

For example, if you purchased a property in 2000 for £100k and it has grown to £400k today, on the surface the capital gain is £300k. However, under the 2015 ruling, you are able to take the 6th April 2015 value as the effective purchase price. In this example, imagine the 2015 value was £350k, then your taxable gain decreased from £300k to £50k.

Bear in mind that, in this example, Portuguese capital gains tax (unless you qualify for IFICI) would also apply so a careful comparison and calculation of the two tax results is required.

Investment strategy

If you have UK-based investments, these are likely sterling-denominated with a UK bias. This is something that has negatively affected investment returns over recent years relative to say, global portfolios which have outperformed substantially. For example, over the last 10 years, the UK market has grown by 98.68% whereas the world index has grown by 176.21%.

The move to Portugal provides an opportunity to reassess currency exposure and to diversify globally, potentially improving returns and reducing risk.

General planning points

IHT planning

Portugal has no inheritance tax, but UK IHT may still apply for long-term UK residents. Following the October 2024 UK budget, IHT assessment is now residence-based based which is a much simpler system than the former Domicile regime.

Those moving direct from the UK are likely to be considered UK long-term residents (resident in the UK for 10 years or more out the last 20) and so will continue to have a UK IHT obligation on worldwide assets. However, once you meet the non-UK long-term residence rules, only UK-based assets will be subject to UK IHT. This has led many to move assets out of the UK.

Wills

In moving countries, ensure your assets are protected with appropriate wills. Generally, it is advisable to have separate wills for UK and Portuguese assets. Portugal has “forced heirship” rules, but UK nationals can elect the EU Brussels IV directive in their Portuguese will to bypass these restrictions.

Currency management

Be mindful of currency conversion rates, especially when using banks, which typically offer poor rates. Using a reputable currency broker with a presence in Portugal is often more advantageous.

Pension review

UK pensions will always remain subject to UK IHT as they are UK based assets. A thorough review ensures optimal income and succession tax efficiency, as well as the potential to reduce fees and improve investment returns.

Administration issues

Ensure you notify HMRC of your departure via your self-assessment tax return or if you do not complete one, a P85 form. You also need to notify Finanças of your arrival in Portugal and into the tax system, as this is not an automatic process as part of your residence application.

If drawing UK pensions, completing the DT Individual process can prevent tax being deducted at source, as Portugal generally has taxing rights under the UK/Portugal treaty for non-civil service pensions.

Personalised advice is key

Relocating to Portugal opens many financial opportunities but also introduces complexities. Early planning, professional qualified advice, and a careful review of investments, property, pensions, and tax obligations are essential to ensure a smooth transition and long-term financial success.

With over 35 years’ experience, Debrah Broadfield and Mark Quinn are Tax Advisers and Chartered Financial Planners specialising in cross-border advice for expatriates. Contact us at: +351 289 355 316 or portugal@spectrum-ifa.com.