The Portuguese Prime Minister has declared that the special Non-Habitual Residence (“NHR”) regime for non-habitual residents in Portugal will end in 2024. This is a significant announcement for many individuals considering moving from the UK (and other territories) to Portugal in order to potentially mitigate tax liabilities.
Why might the NHR regime be of interest to UK citizens?
As explained here, there has been a significant increase in recent years in individuals considering moving offshore before a business sale as non-UK residents are not subject to UK Capital Gains Tax (CGT) on capital gains realised on the sale of shares. This has been driven by a fear of increases to UK CGT rates and the significant curtailment to Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), the 10% CGT rate for sales of trading companies which now only applies to the first £1m of lifetime capital gains (previously £10m).
Portugal, as a territory which does not currently tax NHRs on offshore capital gains, has been a fashionable destination for UK business owners to consider in recent years because of the favourable tax regime, relative proximity to the UK, pleasant climate and lifestyle, and even their relatively relaxed COVID entry requirements during the height of the pandemic.
What is the NHR regime and what are the tax benefits?
The NHR regime was reduced in response to the financial crisis of the late 2000s, which had a significant impact on Portugal’s economy. On its original introduction, the regime offered a 10-year tax amnesty for foreign citizens moving to and investing in Portugal. The scheme was successful in that it contributed to the recovery of the property market and was a shot in the arm for the wider economy.
In more recent years, the regime rules have changed such that work-age individuals who qualify as non-habitual residents pay a flat income tax rate of 20% on Portuguese income, with pensioners paying 10%. Most worldwide income is exempt from Portuguese tax for NHRs.
Other benefits of NHR status in Portugal are as follows:
- No wealth taxes, gift taxes or inheritance tax on transfers of value to family members
- Free remittance of funds to Portugal
- No minimum stay requirement
- No taxation of offshore capital gains
In order to qualify as an NHR, an individual must have the right to reside in Portugal either through being an EU/EEA/Swiss citizen or through the Golden Visa program (typically available to those committing to significant investments in Portuguese assets), and must not have been Portuguese tax resident for the previous five years. To maintain NHR status, they must either stay in the country for 183 days in a year or maintain a property in Portugal as their habitual residence.
After the 10-year period has passed, if an individual remains Portuguese resident, they will be taxed on the same basis as Portuguese citizens.
What are the implications of the regime ending?
The regime is being scrapped as the government comes under increased political pressure and public protests to take action in the face of a housing crisis, and it is seen as deeply unfair that foreign citizens, typically wealthy ones, are able to benefit from tax treatment which is more favourable than the regime for Portuguese citizens.
The Prime Minister has stated that those currently benefiting from the regime, “will keep it.” Whilst further details on the ending of the regime have yet to be announced, this could mean those who are part-way through the 10-year period will continue to benefit until the 10 years have passed.
The move could come as a blow to shareholders of UK-based owner-managed businesses who are considering moving offshore to mitigate CGT exposure on a future sale. Whilst alternative territories provide similar opportunities, it is unlikely that Portugal will continue to be attractive for UK business owners in the coming years, though we await further information to be released by the Portuguese authorities with more specific details on when the regime will end and any other measures which might replace it.
