Most expats in Portugal don’t realise – but if you’re aged 65 or over, you can entirely avoid paying Capital Gains Tax when you sell your home.
The Portuguese tax code (Article 10), provides relief from Capital Gains Tax on the sale of your home, if the funds are reinvested in a qualifying life insurance policy. Subject to a few important conditions, discussed below.
By investing the money in an investment-linked life policy, like a Portuguese Compliant Investment Bond, you can keep your money growing, and use it to provide an income, whilst deferring the impact of tax.
How old do you have to be?
If you’re looking to reinvest the funds from your property sale inside of a life insurance policy, to benefit from the Capital Gains Tax exemption, you must aged 65 or over at the time of the sale.
If you’re younger than 65, you can still invest in a life insurance policy, but you won’t qualify the CGT exemption when selling your home. This means if you’re under age 65, you either have to pay the tax, or reinvest the funds in another Portuguese property,
Does the property have to be your main residence?
Yes. And it’s not just a requirement that the property is your main residence.
Your property must also have been registered with the Portuguese tax authorities as your tax residence, in the 12 months leading up to the sale.
How long do you have to re-invest the funds?
After your house is sold, you need to reinvest the funds within 6 months of the sale.
It’s important to remember that setting up the right life insurance policy could take 4-6 weeks. So it’s better to start sooner, rather than later.
Do you have to keep the money invested?
Your funds need to stay invested in a qualifying life insurance policy for at least 10 years. But that doesn’t mean your investments within the policy have to stay the same. You can switch funds or investment strategies within your life policy as you need (all tax free).
The policy must also be set up to provide you with a regular income, over this 10 year period. This regular income can’t exceed 7.5% per year, of the amount invested.
It’s worth noting, that if you plan to return to the UK, taking a more modest income of under 5% per year is likely to be sensible. That way your withdrawals won’t impact the tax treatment of your life policy once you return to the UK. Meaning you can still keep the tax benefits, and don’t need to surrender it.
Why investment-linked life insurance?
Investment-linked life insurance contracts, like a Portuguese Compliant Investment Bond, come with a variety of benefits which can extend across different jurisdictions.
Tax-Free Growth
Provided your policy complies with Portuguese regulations, the funds within the policy can grow free of tax on gains or income.
This means inside of the policy you can switch funds, receive dividends and interest, without taxable consequences. And there is only tax to pay when you make a withdrawal from the policy. The tax only applies to the gain portion of the withdrawal, not your original capital.
Tax Reduction
In Portugal compliant life policies are subject to a discounted tax regime after they’ve been held for a set amount of years. The tax rate starts at 28% (the default tax rate for savings income) for the first 5 years. After 8 years, only 40% of any gains are taxable, reducing your effective tax rate to 11.2%.
Investment Selection
By investing through an investment-linked life insurance policy, you’re able to access a wide range of investment choices. These include:
- Discretionary fund managers – who automatically manage your portfolio, with no input required.
- Investment platforms – these can be held inside of your life police, where a variety of funds can be bought on an advisory basis. It’s popular amongst expats who already hold other investments or pensions on the same platform, but not absolutely necessary.
- Open architecture – you can also access a wide variety of investment funds directly through the insurance provider, again on an advisory basis, where an adviser would assist you in making investment decisions.
Across these options, you’re usually able to access over 10,000 different investment solutions – so your portfolio isn’t limited by the options available.
Flexibility
Portuguese Compliant Investment Bonds can opened with a starting initial investment of €100,000. If you want to add extra funds you can top up an existing policy with a minimum additional contribution of €20,000.
Regular withdrawals can be set up from a minimum of €300, and the minimum amount for a single withdrawal is €500. Provided €15,000 remains in your policy, you can withdraw any amount and your policy remains active.
Portability
Subject to certain criteria, these policies are also tax efficient in other jurisdictions, like the UK, Australia, Asia and South Africa. So if you relocate, you can potentially take the policy with you without realising any taxable gains whilst moving.
For British expats returning to the UK, foreign life insurance policies, allow you to withdraw 5% of initial investment each year (up to 100% or the initial investment in total) without incurring any tax charges. This makes life insurance a powerful tool for tax deferral.
In Australia, investment-linked life insurance held for 11 years or more, can be surrendered without any tax consequences. And the gains are treated as a bonus for tax purposes.
In much of Asia, and South Africa, the policies allow for your funds to grow free of tax, with tax only due on surrender.
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