From time to time we receive questions from our readers, for specific situations that sometimes may be similar to the queries of other readers. In view of that, we decided to publish the answers. If you also have some questions regarding tax in Portugal, please feel free to send it to us.
Q Can you explain the tax implications of selling a property here? I understand that if I down-size and move from my house to an apartment, I will be taxed on the difference between the sale and the purchase price. Is this correct? And what if I sell but don’t buy, and choose to rent?
First of all let me tell you that you can only use the reinvestment to avoid capital gains, if you are resident and the property you are selling is your main residency. This means that your address at the tax office, must be the address of the property being sold.
You are only liable for tax, if you had a gain on the transaction. Please note that the value you paid for the property needs to be adjusted, according to the inflation coefficient, applicable to the year of purchase. This means that the purchase value will increase for the capital gains calculation.
Also, from the sale of your property you can deduct, the costs incurred with the purchase operation and sale of the property, costs incurred in property over the past twelve years, such as property refurbishments or other money spent to increase the value of the asset, including the cost of the energy certification.
If after this, you still made a gain, then you can reinvest the proceedings of the sale on another purchase within the EU. This needs to be done on a purchase made between 24 months prior and 36 months after the sale. If the reinvestment in the new property is lower than the total sale, than the tax will be calculated pro-rata.
So in this case, if you are selling for 400.000€ and your tax bill was going to be 25.000€, you will only be tax exempt if you reinvest the full sale price 400.000€. If your new apartment only costs 200.000€, then your tax bill will be 12.500€, has you only reinvested half.
If you decide to rent and not to reinvest, then you are liable for the full tax bill. The payment of the capital gain, occurs in August of the year following the sale.
Q I still have a property in the UK and a bank account there, credit cards etc, but am spending an increasing amount of time at my home in the Algarve, where I also have a bank account and debit cards. I am not a resident. My clients are UK based, and I invoice them for consultancy services in the UK and in sterling. Can I continue with this if I take up residency here. Would I be better off invoicing them in Euros from my Algarve address?
It’s important that people realise that even if they are non-resident, but the consultancy services they provide, are made from a fixed based in Portugal, then it should be taxed here anyway. The same would apply for a Portuguese resident, operating from a fixed based in the UK.
On another note, if you are spending more than 183 days per year in Portugal, then you should be taking tax residency.
To be able to invoice your clients from Portugal and be registered here, either as a resident or as a non-resident you would need to register under category B.
If you are non-resident and registered on the simplified regime, you would be taxed at a fixed rate of 18.75%, irrespective of your earnings. So, per each 10.000€ invoiced, you would pay 1.875€.
If you were resident, the tax to be paid would depend on your overall income, as the taxation would be on a sliding scale. For instance, if invoicing only 10.000€ per year and without any deductions, you would be paying 1.144€. But on the first year you register as a sole trader, the calculation would be over 50% of the income and over 75% on the second year, so a lot lower. Also, as a resident you may deduct other expenses, such as medical bills and use the number of dependents as a tax deduction. So the tax bill is likely to be lower than this.
As a new resident, you can also apply for the Non-Habitual residency scheme and your tax rate would be set to a maximum of 20% of your income. This is particularly attractive for tax payers with high levels of income.
Please note that if you decide to become Portuguese tax resident and rent the property you leave in the UK, you will be liable for tax on your rentals in the UK (if above the threshold). In Portugal you will also have to declare this income, but Portugal grants an international tax credit for tax paid in the UK, and then assesses the rental income under Portuguese rules.
Please feel free to send us the questions you may have to firstname.lastname@example.org.
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