In January 2024, the Portugal Non-Habitual Residency (NHR) program ended. However, the transition regime will allow individuals to apply for NHR status until the end of 2024 if they meet specific conditions.
If you have NHR in Portugal, you won’t have any immediate effects. You can continue to receive the tax advantages offered by the program until your 10-year term ends.
What Is Non-Habitual Residency (NHR)?
Portugal’s Non-Habitual Residency (NHR) program was designed to attract foreign residents by offering them appealing tax breaks for a period of 10 years.
For qualified expatriates, this included reduced tax on foreign-sourced income, such as pensions, dividends, and capital gains.
What Happens When Your NHR Ends?
After the 10-year NHR period, the tax benefits offered expire, meaning expats are subject to the standard Portuguese tax system.
This transition will have significant financial implications. The standard tax rate on foreign income (including pensions) can rise to 48% and capital gains to a flat 28%. If assets generating capital gains are on Portugal’s ‘Tax Haven’ blacklists, the rate increases to 35%.
Without the NHR tax protections, expats will have increased tax obligations, are at risk of double taxation, and will need to undergo complex tax planning.
UK Budget Changes, Pensions, and Inheritance Planning
In addition, for British Nationals, the UK Budget has introduced an inheritance tax on private pensions, SIPPS, and Defined Contribution Pensions.
Previously, these pensions weren’t considered a part of the estate for inheritance tax purposes. However, as of 2027, these will now be subject to inheritance tax, meaning assets over the threshold of £325,000 (changing to £500,000 in the future) will be taxed at a rate of 40%.
Maximizing Financial Benefits Before Your NHR Expires
Despite the challenges introduced by the UK’s Budget Changes, British expatriates under NHR still have some options to reduce the tax impact.
One way is by optimizing pension withdrawals at the current 10% NHR tax rate. By taking advantage of this rate, expats can reduce their tax burden on pension income.
After withdrawing a pension at the current 10% NHR rate, expatriates can then further protect their wealth by reinvesting these funds in tax-efficient accounts or assets that align better with the new Portuguese tax regulations.
Preparing for Post-NHR
Before your NHR expires, it’s best to revisit your financial plan as early as possible. By revisiting, you can look into a few options, making the transition between NHR and standard Portuguese tax rates more efficient.
When you’re close to this stage of your life, it’s always best to consult with a cross-border financial adviser. There’s not a “one-size-fits-all” solution, so a financial professional can help you develop a custom plan to address individual challenges and leverage opportunities that can reduce your tax liabilities by 60%.
Final Thoughts
For UK expats residing in Portugal, the end of NHR and UK Budget changes present some unique challenges.
If these challenges aren’t dealt with quickly and effectively, UK expats in Portugal will face huge tax bills in the future.
That’s why you must be proactive before the UK Budget changes in 2027 and before your NHR expires.
To start planning for this change, book a free consultation with me today. I’ll create a tailored plan suited to your financial situation, ensuring the best financial future for you and your family.
