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WEBINAR: Moving to Portugal as an American

WEBINAR: Moving to Portugal as an American

Let’s dive into financial life in Portugal as an American.

When people reach out to our team of US expat financial advisors, there’s a good chance they’re either living or planning a move to a certain place – Portugal. And it’s not just something we’ve seen. It’s something the Wall Street Journal & LA Times have written about, too.

So as Portugal continues to grow in its popularity for Americans moving abroad, we’re focusing in on the key components of such a move from a finance & investing lens. After all, those areas will impact your experience in Portugal, whether it’s two years or for the duration of your retirement.

Our team of advisors – Stan Farmer, CFP®, J.D; Syl Michelin, CFA; and Keith Poniewaz, Ph.D. – present and then answer questions in the second portion of the webinar. Questions before or after watching the webinar? Send us an email at [email protected].

You can watch the full replay below or on Walkner Condon Financial Advisors’ YouTube channel.

If you have any questions, we’d encourage you to submit them ahead of time using the button below.

DISCLOSURES
Walkner Condon Financial Advisors is a registered investment advisor with the SEC and the opinions expressed by Walkner Condon Financial Advisors and its advisors in this webinar are their own. Registration with the SEC does not imply a certain level of skill or training. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Information presented in this webinar is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Information in this webinar does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Viewers are encouraged to seek advice from a qualified tax, legal, or investment advisor to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.

Moving to Spain as an American: Financial Factors to Know

Moving to Spain as an American: Financial Factors to Know

When it comes to top destinations abroad for Americans and U.S. expats, Spain is certainly one of the favorite choices. There are roughly 40,000-50,000 Americans residing in Spain, depending on the source you reference.

For Americans moving to Spain, or thinking about such a move – whether it’s for temporary work for a U.S. company, a job that is based in Spain, or retirement – there are many financial components to consider. It’s not just as simple as leaving your U.S. finances behind when you board the plane.

Walkner Condon’s Keith Poniewaz, Ph.D., walks you through several of the key financial considerations to be aware of if you’re planning a move or even just thinking about one.

A financial advisor who works with U.S. expats, Keith covers Foreign Earned Income Exclusion (FEIE), trusts and inheritance, why the location of your investments matters, and more.

Is relocation from the U.S. to Spain in your future? You can schedule a meeting to discuss your details more in-depth with our team of U.S. expat financial advisors below.

American Abroad and Accounts Being Closed by Fisher Investments

American Abroad and Accounts Being Closed by Fisher Investments

We’ve recently heard from a handful of Americans abroad who had either moved outside of the United States or updated their U.S. address to an international one, resulting in Fisher Investments closing their accounts (or informing of the intent to close their accounts). 

Now, this closing of accounts is nothing new when it comes to Americans moving abroad and trying to seamlessly move their investments with them. But this is the first we’ve heard of the account issues with Fisher Investments for U.S. expats. However, regardless of the brokerage, we’ve helped seek out solutions for U.S. expats in similar situations. 

Below, we outline some of the key points of the conversations we have related to this topic. 

Why Exactly Are My Fisher Investments Accounts Being Closed? 

In the case of Fisher Investments, it’s unclear whether the accounts are being closed based specifically on the country of residence or if it’s being done for all Americans abroad. Though, as we’ve mentioned, this is a common obstacle for U.S. expats with many of the main brokerages, including Wells Fargo, UBS, and others. Simply put, this issue tends to boil down to compliance and the costs, and other burdens, inherent in maintaining that compliance in an international landscape. The Foreign Account Tax Compliance Act, or FATCA, along with many other financial regulations related to anti-money laundering have played a role in this higher compliance environment. If you’re looking for more in-depth information on the subject, we wrote extensively about the difficulties of opening accounts as a U.S. expat in this whitepaper

And it’s not just the financial component. As privacy regulations continue to tighten abroad, it’s also become increasingly more challenging to advertise and acquire new clients that live outside of the U.S. Not only is the cost of doing business more onerous, but the cost of growing that business is also compounded by compliance. 

What Brokerage Should I Use Now?

Unfortunately, there’s no one-size-fits-all solution when it comes to a brokerage for Americans abroad. It’s a vast landscape from a regulatory standpoint, so some brokerages serve certain areas while others choose not to. Charles Schwab, Interactive Brokers, and TD Ameritrade all provide services to U.S. expats, though it can vary by country. We dive more into the various brokerage options, and their pros and cons, for Americans aboard in this piece

How Walkner Condon Can Help

Our team of financial advisors – Stan Farmer, CFP®, J.D.; Syl Michelin, CFA®; and Keith Poniewaz, Ph.D. – works with U.S. expats and understands the intricacies of financial planning for Americans abroad. They help our clients with wealth management, guiding them through hurdles of currency, taxation, and country-specific regulations and building investment portfolios attuned to their specific needs and risk tolerance. You can learn more about the various subjects impacting U.S. expats in our Expat Investment Guide

If you have any questions, don’t hesitate to send us an email here or book an appointment with one of our advisors.

Five Things for Americans to Know Before Moving to the United Kingdom

Five Things for Americans to Know Before Moving to the United Kingdom

With our historical links and common language, it is no surprise that hundreds of thousands (at least 200,000) American citizens reside in the United Kingdom. London has long been a truly international city and many Americans live and work in the greater metropolitan area. In my professional experience, more U.S. expats in the United Kingdom choose to remain in the UK than may be the case in any other foreign country. In fact, many clients come to identify as Brits and hold U.S./UK dual citizenship. 

However, whether you are considering a short, intermediate, or long-term move to the United Kingdom, there are a variety of planning topics that are best considered prior to making the move. In this blog, I discuss five key issues, but there are many, many more unique tax, estate planning, and investment issues that Americans in the United Kingdom may have to deal with once they become a resident in the United Kingdom. Each one of these issues below would merit a separate article, so consider this a cursory examination of these five topics that hopefully lead to further inquiry and discussion with your accountants, attorneys, and/or financial planners.

UNDERSTAND THE DIFFERENCE BETWEEN REMITTANCE BASIS AND ARISING BASIS TAXATION

Unlike the United States tax policy of taxing its citizens on their global income regardless of where they reside, most countries, including the UK, subject only those who are tax residents of that country to income taxes on both their country-sourced and non-country-sourced income (i.e., their worldwide income). To attract affluent foreigners and foreign companies to the UK, the UK has created a temporary tax status for non-UK nationals who chose to become residents of the UK called the “remittance-based” election. 

Accordingly, during the first seven years of UK tax residency, a non-UK national may elect the remittance basis on their UK income tax return, and thereby pay UK income tax only on two types of income: (1) UK-sourced income, and (2) non-UK-sourced income that is remitted to the United Kingdom. Remitting generally means that the funds are physically moved to the UK or used to pay UK obligations or purchase goods, services, or other assets in the United Kingdom. This election can be freely made for the first seven years; but, there are substantial fees/taxes paid to the HMRC (Her Majesty’s Revenue & Customs) to extend that privilege for a limited period (up to eight more years) thereafter. For those that do not elect the remittance basis, or for those whose remittance-basis term has expired, UK taxes income on the “arising basis,” meaning simply that all income from all sources (foreign and abroad) is taxed in the year in which it is received by the taxpayer.

At first blush, remittance basis sounds like a proverbial no-brainer for any expatriate that will derive any income from outside of the UK, whether that income is earned through business conducted outside of the UK, earned through passive investments in real estate, stocks, bonds, etc., or otherwise is characterized as non-UK-sourced income. However, the decision to elect the remittance basis in any of those initial seven years of UK tax residency is one that should be very carefully considered. Without going into considerable detail (and the rules surrounding remittance taxation contain meticulous details) the remittance basis can create accounting headaches, perhaps even nightmares, whenever funds are eventually remitted to the UK and the UK taxes come due on that part of the remitted funds that are attributable to income earned during the period in which remittance basis was claimed. The process of attribution involves what has come to be known as the “clean capital ordering rules,” and pitfalls abound when trying to track and trace the underlying UK tax characteristics of offshore funds (in particular investment accounts) when some of those resources are remitted to the UK. 

Accordingly, there are circumstances where remittance basis makes perfect sense. To the extent that:

  • The U.S. expat is confident that the UK stay will not evolve into something longer-term or even permanent, and/or;
  • The U.S. expat has considerable non-UK-sourced income (e.g., from a very large investment within a U.S. taxable brokerage account, or perhaps through partnership income in a global concern where only a fraction of earned income is attributed to UK sources);

then remittance basis should be very seriously considered to lessen the UK income tax burden. Conversely, where the U.S. expat has modest income from non-UK sources or where the UK tax residency may become longer-term or even permanent, then the calculus may well favor UK income taxation on the arising basis from the onset of becoming a UK tax resident. In all cases, this is a decision facing all Americans moving to the UK and should be carefully contemplated with the advice of experienced professionals.

PFIC AND UK TAX RULES FOR “OFFSHORE FUNDS”

It is fundamental that American expats, who obviously live and transact outside of the United States, understand the perils of “offshoring” their taxable investments. By offshoring, I mean owning foreign-registered pooled investments, such as ETFs that are not registered with the SEC and trade predominantly on foreign securities exchanges, mutual funds that are registered with foreign financial regulators and are not subject to U.S. laws and regulations, as well as foreign private equity funds and hedge funds (both of which are usually organized as limited partnerships). The IRS has created special regulations regarding the tax treatment of such foreign pooled investments, known as the “passive foreign investment company” (or “PFIC”) rules. 

A detailed discussion of how these offshore funds are taxed in the U.S. is beyond the scope of this article. For our purposes, it is simply important to understand that “offshore” funds lose their capital gains character because of the PFIC rules, and, therefore, all gains are taxed as ordinary income. That’s for starters – with income recharacterization to prior years in the holding period, interest, and penalties, the tax rate could be 50% and, in some cases, even higher! The bottom line: buying foreign mutual funds, ETFs and other pooled investments outside of a treaty-recognized foreign pension is usually tax toxic to U.S. tax residents.

So an American living in the UK would do well to avoid the temptation to “go native” and open brokerage accounts in the UK and invest in non-U.S.-registered funds. Can the American expat then avoid offshore tax rules by just keeping their investments in the U.S. and purchasing U.S. mutual funds or ETFs? For the American expat in the UK, the answer is usually “NO,” because the UK has similar tax rules with regards to offshore funds and, from a UK perspective, U.S. mutual funds and ETFs are offshore funds. The general HMRC tax rules in the UK therefore would deprive gains on the sale of these offshore funds of the lower and more favorable capital gains rates and instead levy taxes on realized gains at ordinary income tax rates, which tend to be higher than U.S. ordinary income tax rates. What a mess the U.S. expat investor might find themselves in trying to navigate the offshore funds rules of two different national tax authorities!

One way the U.S. expat might avoid these onerous tax rates would be to avoid “pooled” investments by just buying individual securities and building a fund-free portfolio of individual stocks and bonds. Naturally, this may be an imperfect solution at best for investors that don’t have the capital to adequately diversify such a portfolio. Moreover, even with ample capital to do so, most investors have their own careers, families, and social lives to manage and don’t want to be their own portfolio managers. 

Fortunately, the HMRC’s offshore funds tax rules do provide an important exception: where the foreign fund provides adequate accounting through reports sent annually to the HMRC, investors in these offshore “reporting funds” will be exempted from the special tax rules and will be entitled to capital gains treatment on gains generated from these reporting funds. Although the vast majority of U.S. mutual funds and U.S. ETFs do not qualify as reporting funds in the UK, there are enough decent U.S. funds that are in fact UK reporting funds that a fairly quality, low cost, and well-diversified portfolio can in fact be constructed. The main challenge is scouring the HMRC’s spreadsheet with thousands of reporting funds and identifying those that are indeed U.S.-registered. Beware the foreign “clones” of U.S.-registered funds that carry the same names of their U.S. counterparts but are, in fact, PFICs!

UNDERSTAND THE INTERPLAY OF U.S. AND UK RULES REGARDING RETIREMENT ACCOUNTS, INCLUDING THE INCOME TAX TREATY

There are some advantageous and truly cooperative nuggets in the income tax treaty (and the technical explanation thereof) between the United States and the United Kingdom, particularly in the area of retirement accounts or “pensions.” For example, because of the treaty, distributions from a U.S. Roth IRA in retirement will enjoy the same tax-free qualities for a UK tax resident (expat or otherwise) as they do for domestic American taxpayers. Additionally, those horrid PFIC and Reporting Fund rules discussed in the previous section will be irrelevant to investments in retirement accounts in either country so long as the treaty benefit is claimed. There are other special rules regarding the special tax-free 25% lump-sum distribution from a UK pension that may benefit a former U.S. expat that participated in a UK pension scheme but thereafter returns to the U.S. before taking the lump-sum distribution. It is critical to work with advisors that can help the U.S. expat position their accounts to truly navigate the tax rules and take full advantage of these types of beneficial treaty provisions.

Unfortunately, for high-net-worth individuals, there have been severe limits put in place in the UK in recent years on how much can be contributed in tax-advantaged pension schemes. These newer rules tend to severely limit the contributions by and on behalf of higher earners in the UK to their company pension and even personal pension (SIPP) accounts. Interestingly, these rules will also dramatically affect the tax deductibility on UK tax returns of contributions to U.S. qualified retirement plans as well. Therefore, for Americans working and earning in the United Kingdom, it is particularly crucial to get the input of a UK tax accountant to assist in determining how much should or can be contributed to retirement plans and pensions regardless of where they are held for each and every UK tax year. Moreover, U.S. retirement contribution eligibility rules, rules on the deductibility of retirement plan contributions, and so forth require the U.S. expat to also discuss all (not just domestic) retirement plan contributions with their U.S. accountant to ensure that the investor’s strategy is tax optimal under U.S. tax rules, too. 

“COMMON LAW?” – CAUTION WHEN BRINGING A U.S. TRUST WITH YOU TO THE UK

Trusts, like most estate planning issues and tools, are a creature of local law. It is a common folly of many expats, and even domestic U.S. attorneys, to believe that an estate plan carefully crafted under the laws of a particular state in the U.S. can be taken abroad and continue to operate as intended. It usually won’t, and, in some instances, a good domestic estate plan may well backfire spectacularly when the family, or one or more of its members, moves abroad. That’s a very broad and general statement, but consider it is based on my experiences as an expat advisor who has witnessed the unintended consequences materialize from a domestic estate plan when the legal and tax issues unfold in the cross-border/expat environment. To put it bluntly: when you move somewhere else, new rules apply, and it is highly unlikely that the original estate plan was crafted with any of the new rules in mind.

Another broad and general statement can be made about trusts: The more sophisticated an estate plan, the more likely that it will backfire in the cross-border environment and the more costly the unintended consequences that will materialize. However, we’re talking about moving to the United Kingdom – the birthplace of trust instruments– and one might think that a U.S. trust would always work just as well in the UK as it would in the domestic U.S. scenario, but one could pay a dear price for such an innocent assumption. 

For example, a U.S. expat family has utilized trusts that provide that one or more of the expat family members who serve as trustee. If the trustees of a U.S. trust become UK tax residents, the trust becomes a UK tax resident. From the UK perspective, the trust has been “on-shored” so to speak, and the trust is now a UK tax resident. Things can get even more complicated from there: what if the trustee(s) returns to the United States thereafter? From the UK legal and tax perspective, this could represent an “off-shoring” of the trust – the trust will no longer be characterized as a UK domestic trust, but as an offshore trust. The tax implications that flow from offshoring a trust are usually that an “exit tax” must be paid, which means that all unrealized gains from trust property are thereby realized and capital gains from the recognition of gain are now owed to the HMRC. 

Quite often, a few minor (or less minor, depending on the trust) changes to the trust could have been made before the trustee(s) moved to the UK, which may have prevented this issue from ever materializing. If minor changes do not suffice, the trust might need to be dissolved prior to the move. Accordingly, when family wealth is in any manner managed or protected by trusts, some legal advice (i.e., an estate plan review) from an estate planning expert in the future country of residency (in this case, the United Kingdom) can be critically important.

UNDERSTAND UK “DOMICILE” AND IT’S IMPLICATIONS

U.S. and UK income taxes differ in a variety of ways (e.g., the tax liability on the sale of a primary or secondary residence) and there may be a substantial income tax-rate divergence between the two countries for a given U.S. expat living in the United Kingdom, depending on the expat’s current income. However, the taxation of wealth transfers (gifts during your lifetime, or bequests/transfers upon death) should also be considered as the expat accumulates wealth. Like the U.S, the UK may tax gifts made during the life of the donor and will also tax the estate of a decedent before their wealth is transferred via their estate plan. Unlike the U.S., there may be income tax owed by the donor (known as a “deemed disposition”). Here, the opportunity for divergence between U.S. and UK tax exposure can be quite profound, due largely (but not exclusively) to the different exemption levels under the current tax laws of both countries. 

For example, in 2021, the United States provides a very generous lifetime personal exemption for gift and estate taxes of $11.7 million ($23.4 million for a U.S. married citizen couple). In stark contrast, the UK individual estate (IHT) exemption is only £325,000 (£650k for a UK domiciled couple), with possibly an additional allowance of £125,000 for the decedent’s primary residence. That differential puts a tremendous premium on estate tax planning and financial planning in general. 

A crucial part of determining the current and future UK IHT tax exposures for a U.S. expat family centers on whether the family, or individual members thereof, have voluntarily or involuntarily attained the status of a UK domicile. If a person is determined to be domiciled in the UK, then their worldwide estate would be subject to IHT. If tax residency and entrenchment have not yet crossed the threshold of domicile, then only the UK situs property will be subject to potential IHT tax liability. Domicile is a common law term that combines residency and long-term intention. Accordingly, there is a degree of subjectivity when determining whether an American expat has become entrenched in the UK to the point that this key threshold has been breached. 

It can be difficult to ascertain in close cases whether an expat’s behavior demonstrates enough intent to assure an HMRC finding that the expat is a UK domicile. On the one hand, if an expat moves to the UK on a work assignment (secondment) and spends five years living with family in a home that is rented by the company, it is certainly less likely that the status of domicile has been achieved. However, if that expat and family buy a home, apply for citizenship, sell their U.S. home, and effectively cut most ties with their old American community, the probabilities increase dramatically that the family would be considered UK domiciles. 

To combat the efforts for long-term UK tax residents to evade domicile status, the UK has created a “deemed-domicile” status or threshold based on the more objective criteria of how many years an individual has held UK tax resident status. Under the rules that went into effect in 2017, once the expat has held UK tax residency for 15 years of a 20-year period, that expat is thereafter deemed a domicile of the United Kingdom, regardless of any other circumstances. Beyond IHT exposure, this will also mean that the expat can no longer utilize the remittance basis of taxation (which requires substantial payments beyond year seven but is now unavailable at any cost after year 15).

Prior to obtaining domicile, steps can be taken to protect non-UK wealth from IHT exposure, but such planning is going to require retaining very specialized estate planning counsel. Given that the deemed domicile status is, in a temporal sense, the maximum but by no means a minimum time within which domicile can occur, an important first step for such planning would be to have counsel conduct what is sometimes referred to as a “domicile audit,” which may be a series of meetings and/or detailed questionnaires to first determine the current status of an expat, as well as determine what, if any, wealth might be strategically sheltered from the expat’s taxable (IHT) estate.

PLANNING AND INVESTMENT ISSUES ABOUND

Please consider this a very cursory examination of five key issues that should be considered and incorporated into your financial planning and your portfolios before completing the journey to live in the United Kingdom. This is by no means an exhaustive inventory, nor a complete examination of the financial, tax and legal issues within each area. It is our intention at Walkner Condon to enrich the expat communities around the world through sharing knowledge about such topics and to assist Americans who are or may be contemplating a move abroad in the near term or in the future. Through a little pre-move planning and strategic positioning, we believe that the transition to a new home can be less stressful and, ultimately, more rewarding. If you find these issues resonating with your personal situation, I, or one of my team members here at Walkner Condon, would be happy to schedule an introductory meeting with you.

Stan Farmer, J.D., CFP®️

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What to Consider Before Moving to Portugal as a US Expat

What to Consider Before Moving to Portugal as a US Expat

Portugal has been a very attractive retirement destination for foreigners for a long time, and I suspect that in places such as the coastal towns of the Algarve, you might wonder whether Portugal was part of the British Commonwealth of Nations, given the abundance of retired Brits. Portugal has grown tremendously in recent years as a popular destination for Americans, too, and the amount of clients that we serve that now call Portugal home has been an undeniably prominent trend recently. 

In this article we’ll explore five topics that every American moving to Portugal, or considering a move, should know. Whether you plan to work, start or continue a business, or retire in Portugal, these are subjects that you may pique your interest, and perhaps invite further conversations with us as you refine your plans to move to Portugal as an expatriate.

Portugal is H-O-T 

(… and we’re not just talking about the pleasant Mediterranean climate!)

Portugal has long been an expatriate haven, but largely for Europeans. In recent years, however, the growth of the expat population has been rather explosive. In 2018, for example, the Portuguese immigration service (SEF) reported that the number of expats in Portugal grew 13.9% to over 480,000 – a very significant number for a relatively small country. U.S. expats are catching on, too, and there are many reasons to ride the expat wave to Portugal. Some of the legal/immigration and fiscal/tax advantages of Portugal are considered in other sections, but it would be remiss not to lead with the quality of life considerations. A very pleasant climate, a very welcoming and neighborly culture, low crime, affordable health care, great food and wine, and a relatively low cost of living compared to its Western European neighbors all come together to make Portugal a particularly attractive option for expats of all ages. In fact, International Living rated Portugal fifth on its Global Retirement Index, which is based on a study of a comprehensive list of metrics. European neighbors France and Malta came in at eighth and ninth, respectively, making Portugal the top European country on the list.  

Get to Know and Understand the NHR Program

One of the factors that can make Europe a problematic option for expats would be the relatively high taxes that dot the European landscape. Higher income tax rates, wealth cases, inheritance taxes, gift taxes, stamp duties, solidarity taxes, etc. seem to be a daunting fiscal obstacle for expats. Since 2009, Portugal has endeavored to make itself a more attractive option through the Non-Habitual Residence Program, or NHR. It’s not a very apt name, because you have to be a tax resident before you can apply to the NHR program. Participation in the NHR program lasts only up to 10 years, at which point the expat remaining in Portugal would be taxed at Portuguese income tax rates (which can exceed 50% for higher incomes) on their worldwide income. 

If you do opt in the NHR program, most income that is non-Portuguese source income will not be taxed in Portugal. We say “most” for two very important reasons. First, as of March 31, 2020, Portugal started to tax foreign pension income flowing to NHR participants, but only at a rate of 10%. If you have a U.S. pension or IRA and tax distributions, it is very unlikely that you are not paying a higher federal income tax rate than 10%, and the amount you pay in Portuguese income tax on these distributions will produce a foreign tax credit that you can use to directly reduce your U.S. tax liability from this income. Second, and this is where things get rather gray in terms of how Portugal taxes income, it is not clear that all passive income from investments outside of Portugal will not be subject to Portuguese income tax, and opinions, even from accountants, vary on this subject. It is clear that rental income and capital gains from the sale of investment real estate outside of Portugal is not taxed in Portugal. However, income from securities investments (intangible assets) – capital gains, interest, and dividends – may, in fact, be taxed at the standard Portuguese rate in Portugal. You will read many expat sites that state otherwise, but much of the literature is directed at non-U.S. expats (particularly Brits), and it may well be that the specific wording on taxation of dividends and capital gains on intangible property within the income tax treaty between the U.S. and Portugal augers a different, unfavorable outcome. We would encourage you to find and consult with a tax preparer in Portugal to make the final determination on that issue. Either way, the tax treatment of passive income for NHR expats will rate competitively against the tax rates experienced in other developed countries. 

No Wealth Tax in Portugal 

While other countries in Western Europe have conceived new ways to tax their most affluent tax residents based on the level of their affluence (examples include the Swiss Wealth Tax and the Netherlands “Imputed Income” (Box 2) tax), Portugal does not have these types of taxes. However, similar to the French “Impôt sur la Fortune Immobilière” (IFI), which we discussed in this blog post, Portugal recently (2017) has also developed a national property tax on it’s wealthiest property holders. This tax applies only on properties valued above €600,000 for individuals or €1.2 million for property owned jointly by married couples, with annual property tax rates ranging from 0.4% to 1.0%. Of note, unlike the French wealth tax on real property, Portugal’s national property tax applies only to high-value Portuguese real estate and does not apply to properties owned outside of Portugal. 

No Transfer Taxes in Portugal (Sort Of) 

Another differentiator in favor of Portugal is the absence of wealth transfer taxes, which is to say taxation upon the gifting of wealth during one’s lifetime and/or taxation upon inheriting wealth. Western Europe can be a great region of the globe to live, especially given their evolved healthcare systems, but it can be a terrible place to die (or to generously share your prosperity with others beforehand), namely because of their draconian taxation of inheritance and gifts. Since 2004, Portugal became a major exception to that general rule, when it abolished gift and inheritance tax. However, the affluent owner of assets within Portugal should become keenly aware of the stamp duty, which applies to the transfer of Portuguese assets through gifts or by inheritance. The stamp duty applies to transfers to someone other than the owner/decedent’s spouse or lineal descendant (children, grandchildren, etc.) and is imposed at a hefty rate of 10%. Additionally, for income tax purposes, the recipient does not receive a step-up in basis on the gifted or bequeathed property in Portugal, which means potentially significant capital gains

taxes (28% for residents, 25% for non-residents) if the benefactor turns around and sells the Portuguese property. 

Trusts May Surprisingly Work Reasonably Well If You Relocate to Portugal 

First, as a rule, an expat should always have their estate plan reviewed by a local estate planning expert in their prospective country of residence before moving abroad with an incumbent estate plan, particularly if that estate plan has trusts featured within the plan. It is worth emphasizing that most Civil Law countries (of which Portugal is most certainly a member nation with a Roman law heritage) do not recognize trusts and, therefore, trusts usually create legal and tax chaos when applied in a civil law context. 

However, 2015 legal reforms introducing the concept of “fiduciary structures,” and more recent court decisions in Portugal applying these newer laws to trusts have surprisingly led to income tax outcomes on trust distributions that appear much more benign, surprisingly akin to U.S. taxation of trust distributions. For example, these tax decisions have held that ordinary distributions to Portuguese beneficiaries from trust investments receive capital gains treatment (28% tax rate), and no income tax would be assessed upon terminating a trust and distributing its assets to the beneficiaries. In that latter case, only the stamp duties would likely apply to the beneficiary who is not the spouse or lineal descendant of the settlor of the trust. This compares quite favorably in comparison that such distributions would receive in most European civil law jurisdictions (such as France or Germany). With such tolerance for common law structures, perhaps it is not surprising that so many Brits feel very much at home in retirement in Portugal! 

Whether you are already residing in Portugal or contemplating moving to Portugal as a U.S. expat and are looking for someone to help you with wealth management, please feel free to reach out to Walkner Condon Financial Advisors to discuss your specific situation.

Stan Farmer, J.D., CFP®