For a number of years, UK residents who owned a property overseas didn’t have to worry about capital gains tax when selling the property.
In recent years there has been significant changes and most UK residents with property in Portugal – and other EU countries – have come into firing range.
If you own a property in Portugal and come to sell it, you must first understand the tax implications and what you must do to comply with laws. You will also want to minimise taxation and prevent yourself from paying tax twice.
A simple concept
Capital gains tax is a pretty simple concept. The gain occurs when you sell something – in this case, your property in Portugal – for more than you spent purchasing it.
As with everything tax related, there are certain exemptions and deductions you should be aware of.
A property transaction by a UK resident for their home in Portugal, must be reported to tax authorities; so when you declare the sale on your tax return, the appropriate parties already know of it and don’t come after you.
You must declare the income on both a UK tax return – and a Portuguese tax return. Let us explain why…
Understanding capital gains tax in Portugal
Capital gains tax in Portugal is for the sale of a property at a rate of 28% for individuals and 25% for companies. If the money gained from the sale is re-invested, only half the taxable income is subject to capital gains tax.
When selling your Portuguese property, you are subject to Portuguese Income Tax and must report the transaction.
A gain corresponds to the difference between the sale value and the purchased value. The expenses inherent to the increase in value of the property; made within the last decade – the acquisition and sale of the property, may also be deducted from the tax return.
If you own more than one foreign property and losses are incurred over a sale, they can be offset against other foreign properties. In some cases, carried forward to future years if you make an overall loss.
It is important to understand, you need not pay tax if you made a loss on the sale. You are also exempt should you use the full amount of the sale to purchase another property, to build property or purchase landed intended for construction.
What is the Double Taxation Agreement relief?
There have been some cases in which UK residents have paid double the tax on properties sold.
In many cases, the UK does provide relief on foreign income and gains under the Double Taxation Agreement (DTA). Due to the complexities, the UK signed double taxation treaties which enables residents to claim any double payments, in the event of something going wrong.
As part of the Worldwide Disclosure Facility, both the UK and Portuguese tax authorities are now communicating, which aims to work in your favour. With the Portuguese authorities disclosing information on property sales to HMRC, as well as the correct tax return – you don’t have to worry about paying tax twice on the income made.
Another point to note
As a non-EU resident, a fiscal representative is an appointed company which acts as a liaison between yourself and the Portuguese tax apartment on matters including:
- Property ownership
- Income earned in Portugal
- Bank accounts with a Portuguese credit institution
- Applications for residency in Portugal from the UK
To surmise, careful planning is crucial when selling your property in Portugal, to establish the best approach and avoid paying double the amount on tax – or tax penalties.
At RHJ Accountants, we recognise more than ever that individuals and businesses from the UK may be globally mobile. We aim to make you aware of the tax-efficient opportunities, available tax relief and structure finances for life at home and abroad.
We have seen a massive increase in enquiries from UK companies looking to save on their corporate tax and reduce their Brexit export headaches. Reviewing an organisations operational strategy, we can assist in shifting operations to Portugal in a tax compliant and stress free way.
Our international team of specialists operate from offices in the UK and Portugal. We work together synergistically to provide tax efficient solutions to our clients to help them grow their business whilst keeping tax liabilities to a minimum.