28% Capital Gains Tax!

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Topic Author
CqpedVulture
Posts: 65
Joined: Thu Apr 16, 2015 12:26 pm

28% Capital Gains Tax!

Post by CqpedVulture »

Good day

I’m a UK citizen moving to live in Portugal.
Without going into too much detail, I sold out of my UK Vanguard Lifestrategy investment recently. I have no need to currently pay CGT on that sale, as was tax resident and working internationally, in a tax free country.
However the Capital Gains Taxes on personal stock and bond investments, such as Vanguard ETF’s in Portugal are a flat rate of 28%.
That is high. UK is 20% and average seems to be 10 - 20% globally.

I sold out of the fund not because of trying to time markets, but because I’ve been wanting to buy into a simple 2 fund portfolio for many years now, such as Vanguard’s VWRL and possibly a total bond ETF. (I don’t like the UK bias of the Lifestrategy fund and prefer to manage my own asset allocation with a simple rebalancing of 2 global market cap weighted ETF’s)

I spoke to a Portugese based tax advisor who says some expats avoid the 28% CGT by purchasing a “tax wrapper” to purchase these investments into. The issue with these are a 0.4 to 0.6% annual fee on top of an approximate 0.2% for your fund or ETF and quite an expensive setup fee!
You are then tied into this “wrapper” for 8 years, without being able to access at least most your money. After 8 years you would then only pay 11% CGT on any sales of your funds.
The Portugese tax accountant and my US based fiduciary advisor both don’t like this type of “tax wrapper” setup and neither do I, but 28% CGT is a lot to pay.
Do I just accept this and take the hit?!

I’m looking to buy back into the VWRL ETF and possibly some global bond fund this year. Actually not convinced about initially bothering with a bond fund given where interest rates are now and another 10 years in the markets at 49 years old, but that’s another story.

My other thoughts are to leave the financial markets totally and buy property in Portugal, or ease my way in 1 property at a time and see how that works.
You are only paying CGT on 50% of the total Capital Gain on the sale of property in Portugal.
Not sure what your “return on investment” is likely to be there, but some income on rentals and some physical assets might be a good option.
My confidence in the financial markets are at an all time low, given where interest rates are, the levels of global debt we are in and such high global inflation.

Comments appreciated.
gougou
Posts: 1317
Joined: Thu Sep 28, 2017 7:42 pm

Re: 28% Capital Gains Tax!

Post by gougou »

Look up the Non-Habitual Resident tax regime in Portugal. It looks like you can avoid capital gains tax for the first 10 years of living in Portugal.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
Topic Author
CqpedVulture
Posts: 65
Joined: Thu Apr 16, 2015 12:26 pm

Re: 28% Capital Gains Tax!

Post by CqpedVulture »

Under NHR you get 10% on personal stocks and bonds if you can prove you have already paid CGT on those investments elsewhere, which I haven’t.
Also been given conflicting tax advice on whether I can gain NHR. It depends on your occupation.
So I don’t think the CGT tax relief under NHR is an option for me.
robertvax
Posts: 13
Joined: Wed Apr 20, 2022 1:49 pm

Re: 28% Capital Gains Tax!

Post by robertvax »

gougou wrote: Wed Jul 06, 2022 6:15 pm Look up the Non-Habitual Resident tax regime in Portugal. It looks like you can avoid capital gains tax for the first 10 years of living in Portugal.
This is a common misconception, but it's not correct. Even under Portugal's NHR (non-habitual resident) tax rules, in the vast majority of cases, capital gains on the sale of corporate shares, including ETFs, shares of stock, and mutual funds, are taxable in Portugal at Portugal's 28% rate. One source to consult for this rule is here:

https://htj.tax/2021/09/htj-podcast-web ... mber-2021/

The tax attorney they interviewed does mention that there are a very small number of corner cases, dependent on the exact language of the dual tax treaty signed between Portugal and the country where the gains are generated, for which the capital gains might not be taxable in Portugal. However those cases are presumably extremely rare.

One possibility during the 10 years of NHR would be to shift heavily into dividend-producing stocks and funds, because in general, dividends received from non-Portugal funds under NHR are NOT taxable in Portugal.

- RV
robertvax
Posts: 13
Joined: Wed Apr 20, 2022 1:49 pm

Re: 28% Capital Gains Tax!

Post by robertvax »

CqpedVulture wrote: Wed Jul 06, 2022 6:37 pm Also been given conflicting tax advice on whether I can gain NHR. It depends on your occupation.
This doesn't sound correct. Every reliable source I've seen on NHR says that the requirements are quite minimal, and aren't tied to your occupation:

1. You must NOT have been a tax resident of Portugal for the previous 5 years.
2. You must currently be a tax resident of Portugal.
3. You have to apply for (request) NHR, it's not automatic.

There ARE some tax rules related to Portugal-sourced and self-employed income under NHR that are dependent on the nature of the work - this is the "high value-added activities" rule. However that's unrelated to whether you can qualify for NHR.

- RV
Topic Author
CqpedVulture
Posts: 65
Joined: Thu Apr 16, 2015 12:26 pm

Re: 28% Capital Gains Tax!

Post by CqpedVulture »

robertvax wrote: Wed Jul 06, 2022 6:46 pm
gougou wrote: Wed Jul 06, 2022 6:15 pm Look up the Non-Habitual Resident tax regime in Portugal. It looks like you can avoid capital gains tax for the first 10 years of living in Portugal.
This is a common misconception, but it's not correct. Even under Portugal's NHR (non-habitual resident) tax rules, in the vast majority of cases, capital gains on the sale of corporate shares, including ETFs, shares of stock, and mutual funds, are taxable in Portugal at Portugal's 28% rate. One source to consult for this rule is here:

https://htj.tax/2021/09/htj-podcast-web ... mber-2021/

The tax attorney they interviewed does mention that there are a very small number of corner cases, dependent on the exact language of the dual tax treaty signed between Portugal and the country where the gains are generated, for which the capital gains might not be taxable in Portugal. However those cases are presumably extremely rare.

One possibility during the 10 years of NHR would be to shift heavily into dividend-producing stocks and funds, because in general, dividends received from non-Portugal funds under NHR are NOT taxable in Portugal.

- RV
Thanks what you say sounds about right.
That advice on dividend producing funds is useful to know. Does what you say apply even if you simply reinvest the dividend payments straight back into the funds?
If so, very worthwhile
Topic Author
CqpedVulture
Posts: 65
Joined: Thu Apr 16, 2015 12:26 pm

Re: 28% Capital Gains Tax!

Post by CqpedVulture »

robertvax wrote: Wed Jul 06, 2022 6:55 pm
CqpedVulture wrote: Wed Jul 06, 2022 6:37 pm Also been given conflicting tax advice on whether I can gain NHR. It depends on your occupation.
This doesn't sound correct. Every reliable source I've seen on NHR says that the requirements are quite minimal, and aren't tied to your occupation:

1. You must NOT have been a tax resident of Portugal for the previous 5 years.
2. You must currently be a tax resident of Portugal.
3. You have to apply for (request) NHR, it's not automatic.

There ARE some tax rules related to Portugal-sourced and self-employed income under NHR that are dependent on the nature of the work - this is the "high value-added activities" rule. However that's unrelated to whether you can qualify for NHR.

- RV
Hi
Agreed. I had a conversation with 2 Portugese tax accountants who gave me differing information but I think it was initially based on “high value activity “ as you mention.
On relocating I’ll see whether I can apply for NHR. I’m relatively confident I can.
If dividend paying stocks are tax exempt under NHR that would be a winner!
Where would I find good information on that I wonder?
assyadh
Posts: 582
Joined: Tue Sep 18, 2018 12:44 pm

Re: 28% Capital Gains Tax!

Post by assyadh »

NHR won't save you from CGT. If you have already sold, the tax is due.
Valuethinker
Posts: 49023
Joined: Fri May 11, 2007 11:07 am

Re: 28% Capital Gains Tax!

Post by Valuethinker »

CqpedVulture wrote: Wed Jul 06, 2022 6:12 pm Good day

I’m a UK citizen moving to live in Portugal.
Without going into too much detail, I sold out of my UK Vanguard Lifestrategy investment recently. I have no need to currently pay CGT on that sale, as was tax resident and working internationally, in a tax free country.
However the Capital Gains Taxes on personal stock and bond investments, such as Vanguard ETF’s in Portugal are a flat rate of 28%.
That is high. UK is 20% and average seems to be 10 - 20% globally.

I sold out of the fund not because of trying to time markets, but because I’ve been wanting to buy into a simple 2 fund portfolio for many years now, such as Vanguard’s VWRL and possibly a total bond ETF. (I don’t like the UK bias of the Lifestrategy fund and prefer to manage my own asset allocation with a simple rebalancing of 2 global market cap weighted ETF’s)

I spoke to a Portugese based tax advisor who says some expats avoid the 28% CGT by purchasing a “tax wrapper” to purchase these investments into. The issue with these are a 0.4 to 0.6% annual fee on top of an approximate 0.2% for your fund or ETF and quite an expensive setup fee!
You are then tied into this “wrapper” for 8 years, without being able to access at least most your money. After 8 years you would then only pay 11% CGT on any sales of your funds.
The Portugese tax accountant and my US based fiduciary advisor both don’t like this type of “tax wrapper” setup and neither do I, but 28% CGT is a lot to pay.
Do I just accept this and take the hit?!

I’m looking to buy back into the VWRL ETF and possibly some global bond fund this year. Actually not convinced about initially bothering with a bond fund given where interest rates are now and another 10 years in the markets at 49 years old, but that’s another story.

My other thoughts are to leave the financial markets totally and buy property in Portugal, or ease my way in 1 property at a time and see how that works.
You are only paying CGT on 50% of the total Capital Gain on the sale of property in Portugal.
Not sure what your “return on investment” is likely to be there, but some income on rentals and some physical assets might be a good option.
My confidence in the financial markets are at an all time low, given where interest rates are, the levels of global debt we are in and such high global inflation.

Comments appreciated.
As you have realised the gain tax is due.

Pay the tax, and move on. I wouldn't get clever with wrappers that don't otherwise make sense.

Much of the capital gains I paid in the UK in the past was at 40% ie my marginal tax rate. It's not always been the case that capital gains taxes were lower.

The question of whether to own Portugese property is entirely separate. Depending on personal circumstances, if you have a 5 year+ horizon living in some place (specific location) then it's probably something you could do.

If it is as a rental investment, then you need to know your market.

As a rule of thumb, estimate your "cap rate" (Yield in UK terminology). You take your Net Operating Income (so after all expenses such as lettings agent fees, property taxes etc) and divide by current value of the house.

If your cap rate > mortgage rate then the property should be cash flow positive. I would (almost) never buy a rental unless it was cash flow positive. Because I would be betting on increases in property value to make a return, so entirely a speculative return.

However rental property comes with lots of hassles and you have to be ready for that.

I say almost never because if you make material improvements to a property that should be recaptured when you sell it, that's a different proposition. However don't underestimate how much repair & maintenance a rental property can take.
HKexpat
Posts: 142
Joined: Thu Dec 24, 2020 4:21 pm

Re: 28% Capital Gains Tax!

Post by HKexpat »

Does Portugal have an exit tax on unrealized capital gains? Might be worth considering relocating for 7 months to a place with no capital gains taxes when you plan on drawing down your investments.
manu
Posts: 8
Joined: Wed Aug 26, 2020 10:04 am

Re: 28% Capital Gains Tax!

Post by manu »

No exit tax.
Topic Author
CqpedVulture
Posts: 65
Joined: Thu Apr 16, 2015 12:26 pm

Re: 28% Capital Gains Tax!

Post by CqpedVulture »

robertvax wrote: Wed Jul 06, 2022 6:46 pm
gougou wrote: Wed Jul 06, 2022 6:15 pm Look up the Non-Habitual Resident tax regime in Portugal. It looks like you can avoid capital gains tax for the first 10 years of living in Portugal.
This is a common misconception, but it's not correct. Even under Portugal's NHR (non-habitual resident) tax rules, in the vast majority of cases, capital gains on the sale of corporate shares, including ETFs, shares of stock, and mutual funds, are taxable in Portugal at Portugal's 28% rate. One source to consult for this rule is here:

https://htj.tax/2021/09/htj-podcast-web ... mber-2021/

The tax attorney they interviewed does mention that there are a very small number of corner cases, dependent on the exact language of the dual tax treaty signed between Portugal and the country where the gains are generated, for which the capital gains might not be taxable in Portugal. However those cases are presumably extremely rare.

One possibility during the 10 years of NHR would be to shift heavily into dividend-producing stocks and funds, because in general, dividends received from non-Portugal funds under NHR are NOT taxable in Portugal.

- RV

If one reinvested those dividends back into the fund, while under NHR would you also manage to avoid paying 28% Capital Gains?
Topic Author
CqpedVulture
Posts: 65
Joined: Thu Apr 16, 2015 12:26 pm

Re: 28% Capital Gains Tax!

Post by CqpedVulture »

assyadh wrote: Thu Jul 07, 2022 1:39 am NHR won't save you from CGT. If you have already sold, the tax is due.
I sold out in a tax residency where no CGT to be paid, so not currently an issue. In the future if I become Portugese tax resident, I want to know the implications.
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