Using Your Pension to Reduce Portuguese Capital Gains Tax

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Selling a property in Portugal can be hard, but perhaps the hardest part is the realisation that you may have to pay capital gains tax. This is especially likely if you come from a country where you don’t normally have to pay capital gains tax when selling your primary residence. 

For residents of Portugal, capital gains tax rates vary from 14.5% to 48%, depending on the individual’s income. Residents pay tax on 50% of the gain, which in practice means paying tax 24% tax rather than 48% tax. Certain deductions are allowed, for example inflation and improvements made to the property in the previous 12 years, but overall the percentages above give a good estimate of how much you should expect to pay. Non-residents pay a flat rate of 28%.

It is possible to avoid capital gains, partially or entirely, by reinvesting the proceeds of the sale into another property. For residents and EU citizens, this can be in Portugal or another country within the EU, although it must be a primary residence as opposed to a second home or to be rented out. Most people are happy to take this route, particularly as they move up the property ladder, but as you get older you may be thinking about downsizing instead.

If you’re 65 or over, it is possible to put that money into a pension or life assurance plan rather than having to put it into another property. It’s also possible to split the re-investment between a property, say something smaller, and a pension or life assurance plan or all three. 

According to Jason Swan of Holborn Assets, “there isn’t a one-size-fits-all solution for everyone. The right solution will depend on factors like the client’s needs, the level of risk they want to take, and the rate at which they want to withdraw from the fund. Our first step is always to speak to the client and get a better understanding of their situation.

“While it’s not essential, most people at this stage in their lives opt for a portfolio that has a much lower level of risk than they might do at a younger age. There’s often less of a focus on stocks and more of a focus on lower-risk investments like bonds, dividends, cash, and different currencies.

“Tax is another important consideration as pensions and life assurance policies are taxed differently, with life assurance benefiting from low tax rates after ten years. Another important consideration is whether the client plans to stay in Portugal or is planning on moving back home at some point as this will influence the product best suited to their needs.” 

Opting for the pension or life assurance investment route and avoiding Portuguese capital gains tax can be appealing, but there are some things to consider. 

The first is that unlike reinvesting the money into another property, which can be done up to three years after the sale in most cases, the money needs to be reinvested into a pension or life assurance plan within six months of the sale. 

Secondly, most managed pension or life assurance funds will come with fees, normally on a percentage basis, and these will need to be weighed up against the savings from not paying capital gains tax. You may also want to compare whether simply buying another property is a better idea.  

Finally, all investments whether property or other investments like a life assurance fund come with an element of risk. 

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Article originally published on 17 July, 2021

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