Mitigate Future Tax Burden Early Well Before Your NHR Tax Status Ends
Webinar (GMT) London & Lisbon Time
This webinar featured industry experts who discussed how existing NHR tax holders can significantly reduce future tax burdens potentially through structuring their assets and income early enough before the end of their 10-year NHR tax incentive period.
Cross-border tax planning experts shared industry secrets about NHR tax planning during and in advance of the of the 10-year qualifying period
Many affluent expats are enjoying the favourable tax benefits of Portugal's Non-Habitual Residency (NHR) tax regime. However, what most current NHR tax status holders don't know is that upon the expiration of their 10-year NHR tax incentive they could be facing progressive tax rates as high as 48% if they do not act early.
According to the recently published 'Wealthy Expats in Portugal Survey Report 2023', only 27% of the existing 72,000 NHR tax status holders have taken any steps to mitigate this impending tax burden by improved structuring of their assets and income early enough in their NHR tax status life.
This informative webinar featured cross-border tax and financial planning experts who shared valuable insights into the common pitfalls and mistakes current NHR tax holders are making and how to avoid these.
This webinar delved into how existing NHR tax holders could mitigate future progressive taxes in Portugal
Steve Philp, Director at Portugal Pathways hosted this webinar and interviewing a panel of experts which includes, Chris Marson, who is CEO of RTI Family Office and with over 30 years of experience managing significant wealth for ultra-high-net-worth international families, Chris possesses expert insight into private equity, wealth management, real estate, technology, and cross-border tax and financial planning.
Joining Chris was Ricardo Chaves, who is CEO and Founder of All Finance Matters, with over 20 years of experience in tax planning in Portugal, he is ideally placed to over some crucial insights into how to tax plan in Portugal.
Our expert panel discussed the proactive measures current expats under NHR tax status can take if they act as early as possible within their 10-year low tax benefit period. The panel can share with the audience case studies from affluent expats who have managed to optimise their tax and financial position for up to 20 years if they structure their assets and income in the right way..
This webinar showcased discussions from experienced panel members on how to minimise future tax liability through early action and potentially enhance your overall financial position for the long term.
Answers to key webinar questions from attendees
Disclaimer: The guidance below and Q&As should not be fully relied upon and does not constitute formal instructed professional advice. In relation to tax advice in Portugal, please engage and instruct a regulated professional for all tax advice and structured financial planning. Please contact Portugal Pathways if you would like an introduction to one of our professional advisors.
My parent's estate is in a farm trust. They are gone now, so can nothing be done by the family in the trust to change how disbursements are handled?
Whether any changes can be made to the disbursement of a farm trust after your parent's death depends on several factors, including:
Terms of the Trust:
The trust document itself will dictate how disbursements are handled. Look for provisions related to distributions, beneficiary interests, and any power of appointment (the ability to designate beneficiaries or change disbursement rules) granted to the trustee or other parties.
Review the language around discretion of the trustee. If the trustee has broad discretion, modifying disbursements might be difficult.
State Law:
Trust laws vary by state. Some states have "boilerplate" trust statutes that may grant beneficiaries or courts certain rights to modify trusts under specific circumstances. Consult with a lawyer specializing in trust law in your state to understand applicable laws.
When you say pensions are taxed efficiently during NHR - in fact I have paid no Portugal tax at all on my UK pension income during 8 years being in NHR so far. Yet I have heard that some tax is payable -which is correct?
The situation regarding taxation of UK pension income under Portugal's Non-Habitual Residency tax regime is nuanced and has evolved over time. Here's a breakdown to clarify the possible scenarios:
Pre-2020 Rule:
Before April 2020, most UK pension income received by NHRs was exempt from Portuguese tax for their first 10 years of residency. This meant you could potentially receive your UK pension tax-free in Portugal for the entire NHR period.
Post-2020 Rule Change:
In April 2020, the NHR program changed. While the tax benefits for most income sources remained the same, a 10% flat tax was introduced on foreign pension income, including UK pensions. This change applies to NHRs who registered on or after April 1st, 2020.
Therefore:
If you registered for NHR before April 2020, you likely have not paid any Portuguese tax on your UK pension income so far and are still exempt under the original NHR rules.
If you registered for NHR on or after April 1st, 2020, you are subject to the 10% flat tax on your UK pension income received in Portugal.
Does your NHR always expire in December of your expiration year?
No, your NHR tax status in Portugal does not always expire in December of your expiration year. The expiration date depends on when you applied and obtained the NHR status.
How does the US IRS go about taxation of suchlife insurance policy gains?
The taxation of life insurance policy gains by the US Internal Revenue Service (IRS) for a US citizen living in Portugal depends on several factors, including:
Type of Policy:
Term Life: Gains from term life policies are generally not taxable, regardless of residency or where the policy was issued.
Whole Life: This is where things get complicated because of its dual nature (investment component and death benefit). Gains from whole life policies can be taxed in different ways depending on how they are accessed:
Cash value withdrawals: Up to the basis (total premiums paid) is generally tax-free. Withdrawals exceeding the basis are taxed as income, but only the portion exceeding the basis.
Policy surrenders: Surrendering a policy before death triggers taxation on any gain exceeding the basis as ordinary income.
Death benefits: Death benefits paid to beneficiaries are generally income tax-free for both US residents and non-residents. However, any interest earned on the death benefit after the insured's death is taxable.
Residency:
US Resident: As a US citizen living in Portugal, you remain subject to US taxation on worldwide income, including life insurance gains. However, you may be entitled to tax credits or deductions based on a tax treaty between the US and Portugal.
Non-Resident: If you become a non-resident for tax purposes (generally exceeding 183 days of presence in the US per year), the taxation of life insurance gains may change. Gains from US-issued policies may still be taxable, but gains from foreign-issued policies may not be taxable in the US unless you meet certain criteria (e.g., exceeding a specific income threshold).
Additional Considerations:
Passive Foreign Investment Company (PFIC) Rules: These complex rules apply to certain foreign corporations, including some types of life insurance policies with investment components. If your life insurance policy is considered a PFIC, you may face additional reporting and tax burdens.
Reporting Requirements: Depending on your residency status and the type of gains, you may need to file specific forms with the IRS to report your life insurance gains.
Is the Life Assurance Policy similar to purchasing an Annuity in the U.S.?
While both Life Assurance Policies and Annuities in the U.S. involve life insurance elements and can provide income in the future, they have some key differences:
Purpose:
Life Assurance Policies: Primary purpose is to provide a Death Benefit to beneficiaries upon the insured's death. Some policies may also have a savings component that builds cash value over time.
Annuities: Primary purpose is to provide a guaranteed income stream in retirement or later in life. Some annuities may also offer a death benefit.
Income Generation:
Life Assurance Policies: Accessing cash value typically reduces the Death Benefit and may be taxed depending on how it's withdrawn. Death Benefit is generally tax-free for beneficiaries.
Annuities: Income payments come from the accumulated principal and earnings in the annuity. Depending on the type of annuity, payments may be taxable as income.
Flexibility:
Life Assurance Policies: Generally offer more flexibility with withdrawals and policy changes, though this can impact the Death Benefit.
Annuities: Often have stricter rules around withdrawals and changes, with potential surrender charges for early withdrawals.
Taxation:
Life Assurance Policies: Taxation varies depending on how the policy is accessed and your residency status. Death Benefit for beneficiaries is generally tax-free in Portugal.
Annuities: Income payments from annuities are typically taxed as income in the U.S.
We would need more information about your specific circumstances.
How tax offset works US -PT based on treaty between US and PT?
Tax offsets between the US and Portugal, based on the Double Taxation Treaty, work to prevent individuals and companies from being taxed twice on the same income. Here's how it works:
General Principle:
Income earned in one country by a resident of the other country can be taxed in both countries without double taxation.
Mechanism:
Foreign Tax Credit: The US allows its residents to credit taxes paid in Portugal on income earned there against their US tax liability. This means you can subtract the amount of Portuguese tax you paid from your US taxable income, effectively offsetting part of your US tax burden.
Tax Exemptions: The treaty also provides for specific income categories to be exempt from taxation in one country for residents of the other. For example, certain types of dividends, pensions, and royalties may be exempt from US tax for Portuguese residents.
Whether or not Portugal taxes interest on UK savings bonds depends on several factors, including:
Your residency status:
Portuguese resident: If you are a resident of Portugal for tax purposes, all your worldwide income, including interest from UK savings bonds, is subject to Portuguese taxation. This applies regardless of where the income is earned.
Non-resident: If you are not a resident of Portugal for tax purposes, interest from UK savings bonds may not be taxable in Portugal. However, this depends on the specific type of savings bond and the terms of the Double Taxation Treaty between Portugal and the UK.
Type of savings bond:
Some UK savings bonds are exempt from Portuguese tax, such as Individual Savings Accounts (ISAs) and National Savings Certificates with certain features.
Other UK savings bonds are not exempt from Portuguese tax, and the interest earned will be taxed at the full rate for investment income, which is 28% as of January 2024.
Additional factors:
Amount of income: The amount of interest earned may also affect whether or not it is taxable in Portugal. Portugal has a personal income tax exemption threshold for investment income, which is currently €702.38 per year. If your total income from interest on UK savings bonds is below this threshold, it will not be taxed in Portugal.
Tax treaties: The Double Taxation Treaty between Portugal and the UK may also play a role in determining whether or not interest from UK savings bonds is taxable in Portugal. The treaty provides for certain exemptions and reduced tax rates for specific types of income.
Schedule a free consultation with one of our expert team to understand how you can maximise your future financial and tax position as a wealthy international expat in Portugal.
%20(3).png)
