Tax planning re property

EVEN IF YOU ARE A NON HABITUAL RESIDENT (NHR) WITH PREFERENTIAL TAX STATUS, UK AND PORTUGUESE PROPERTY WILL REMAIN TAXABLE ON BOTH INCOME AND CAPITAL GAINS. MARK QUINN AND DEBRAH BROADFIELD LOOK AT THE PLANNING OPPORTUNITIES YOU CAN TAKE ADVANTAGE OF IN BOTH COUNTRIES

UK PROPERTY PLANNING When selling UK property, you can deduct expenses associated with buying and selling the property, including professional fees and fees incurred on the transfer of property, such as stamp duty. You can also add any expenses incurred in enhancing the property to your base cost.

If the property has ever been your principal private residence (PPR) you can reduce or even eliminate the capital gains tax with Private Residence Relief. This ensures that any period during which the property was your PPR is exempt from tax. For example, if you lived in the property for five years out of a total ownership period of ten, then only 50% of any gain would be subject to tax.

The property is also considered your PPR for nine months after leaving it, so you can increase your tax-free ownership period.

UK ALLOWANCES AVAILABLE Even if you have left the UK, as a UK/EEA national you can retain your annual capital gains tax (CGT) allowance to offset any taxable gain – the current allowance is £6k but falling to £3k from the 2024/25 tax year. If you hold property jointly with your spouse/civil partner, you can combine your CGT allowances (and income tax allowances if letting).

TIMING IS IMPORTANT If possible, selling when you have not sold other assets will ensure your full CGT allowance can be set against the property gain.

If you are still UK tax resident you can also:

Time the sale when your income level is low, as your overall income level determines which CGT band will apply (18% for basic rate tax payers and 28% for higher and additional rate).

And/or higher rate tax payers can potentially lower their tax bands via a pension contribution or donation to charity.

NON-RESIDENT CAPITAL GAINS TAX (NRCGT)

If you are a Portuguese tax resident, you are able to benefit from NRCGT, a UK tax concession which states that only the increase in value of property after April 2015 is taxable, eg if you purchased a property in 2000, any increase in value between 2000 and 2015 is not taxed. This can substantially reduce your tax bill and as stated earlier, you can still retain your annual CGT allowance.

If you also qualify for NHR there would be no tax in Portugal, which under normal circumstances would otherwise be taxed at progressive rates. A further planning angle for those with NHR is that, if properties are held within a company, any dividend taken would be free of tax.

You may find the HMRC link useful when calculating your likely liability https://www.gov.uk/tax-sell-property/ work-out-your-gain

PORTUGAL PROPERTY PLANNING Other properties purchased after January 1989 are subject to capital gains tax on 50% of the gain. Property purchased before this date is not subject to CGT. Do note, NHR does not have any effect on the taxation of Portuguese property. Some expenses are deductible, such as the buying and selling costs. In addition, inflation relief is available in Portugal if the property is held for more than two years.

It is possible to mitigate or even eliminate the taxable gain on a Portuguese main home by:

Reinvesting in another property within the EU

Reinvesting in an approved investment structure

Or, a combination of the two e.g. if you sell a property for €1m, you can downsize into a smaller property for €500k and put the balance of €500k into an approved investment structure. This investment structure can then provide a tax-efficient income for life.

The amount that must be reinvested is the net sale proceeds, not just the gain. Any amount not reinvested is taxable under the normal rules.

There are nuances around these rules so please always seek professional advice. There are also complicated scenarios when selling property held by companies and specialist advice and calculations are required.

Ask The Experts

Debrah Broadfield and Mark Quinn are Chartered Financial Planners (level 6 CII) and Tax Advisers (UK ATT) with 20 years of combined experience advising expatriates in Portugal on cross-border financial and tax planning issues.