Capital Gains Tax

Capital Gains Tax

We all hope and aim to make a solid investment when purchasing a property in Portugal. Over a period of time we expect that it will rise in value and when the time comes to sell it we can reflect on a nice 'profit'. This profit is the difference between the sales price and the purchase price and is usually referred to as a 'capital gain'. It is important to remember that any capital gain will attract a tax when you sell it. So, you will not be entitled to keep all of the profit. There are ways to reduce and maybe avoid this tax although this depends on several factors. Let's explore this in more detail below.

The Paperwork and Figures

Firstly, in order to calculate your capital gain here is a list of the items/paperwork you would usually need;

• The sale price and the purchase price, as documented on the deed/escritura. 
• Any property improvement costs. This needs to be work that genuinely (for the long term) has improved the structure, appearance and worth of the property. Windows, extensions, brickwork are all acceptable. Furniture, gardening for example, isn't. The property improvement costs need to have been documented by acceptable invoices. The iva (vat) is included in the cost unless you were able to claim it back. 
• The amount of buying costs (transfer tax, stamp duty, registration costs).
• The amount of selling costs (for example, our commission, energy certificate cost).

To calculate the gain, we first take the profit from the sale (sale price less purchase price) and deduct the allowable expenses detailed above. 

Residents

This applies to owners who are based in Portugal for the majority of the year and are tax resident here. 

Once you have calculated the gain it is, in effect, added to your income and then you are taxed in line with the existing income tax rates. To calculate this rate, all income is considered. 50% of the capital gain is taxed, at the income tax rates (which currently vary between 14.5% and 48%). There is also an additional tax if the total income tax income bracket exceeds €70,000. This additional tax varies between 2.5% to 5%. So, the maximum charge is 53% of the capital gain. 

Before the capital gain has been calculated there is also an index-linked coefficient that is applied to take into account the inflation of prices over this period. This will reduce the gain to show the 'real' increase, excluding inflation. This usually has a marginal effect on the final gain.

If you are paying taxes under the 'Non-Habitual Tax Regime' then this would override the above and you would pay tax based on your particular scenario. 

Residents can benefit from 'roll-over' relief if they reinvest the proceeds from the sale of their main residence into a new home within the EU. This must be done within 36 months after selling the property (or 24 months prior). If you ultimately fail to repurchase then your tax liability will incur interest. The roll-over or reinvestment relief is based on your equity within the original investment. If it was all your money (and nothing was borrowed) then if the new investment is equal to or higher than the previous equity then the liability is offset 100%. If however you reduce your equity (your own money) in the new investment then the liability is reduced pro-rata. 

Here is an example of the reduced scenario;

Original Property. Bought for €600,000 with a mortgage of €400,000. Sold for €1,300,000. Capital gain is €700,000. 

Reinvest into new property. Bought for €1,300,000 but with a mortgage of €900,000. Even though you invest the same amount (as the property sold) your own money (as a percentage) has reduced. The amount you are investing is €400,000. So, the taxman uses this amount as a percentage to calculate the offset.

Non-Residents

This applies to all properties in Portugal owned by non-residents. As the property will not be your main residence then you do not benefit from any reinvestment/rollover relief. 

Non-residents have the option to decide under which regime they would like to be charged. There are two options: The 'regime-rule' means you will pay tax on 100% of the capital gain at a rate of 28% or alternatively, taxpayers resident in another EU or European Economic Area country (provided there is an exchange of tax information) may choose to be taxed at the general IRS/Income tax rate that would apply if they were tax residents in Portugal.

Conclusion

So, let's recap on those two alternatives with a capital gain of €100,000. With the 'regime-rule' you would pay €28,000. If you pay at the general IRS/Income tax rate then you would pay your 'income tax rate' (bear in mind the gain is also added as income) on €50,000 (50% of the gain). So even if your 'income tax rate' is among the highest levels, the cap/maximum is 48% plus the additional tax takes it to 53%. 53% of €50,000 = €26,500.

Based on this example it makes sense to choose the 'IRS/Income tax' option on the majority of occasions. 

As with residents, there is also an index-linked coefficient that is applied to take into account the inflation of prices over this period. This will reduce the gain to show the 'real' increase, excluding inflation. This usually has a marginal effect on the final gain.

Summary

Clear as mud? We hope not but it does take a clear mind to assimilate this information and you'll probably have to study it a few times. We did! 

Bear in mind the law changes regularly and we are not chartered accountants. We have done our best to give you - as simply as possible - an overview of the different scenarios and what you should expect. We do, however, recommend with all tax and legal matters to consult the appropriate experts for up to date advice and professional guidance. We cannot be held responsible for any actions made on the basis of the information given.