Many taxpayers who were considering relocating to a more tax-friendly country have been gnashing their teeth at the announcement that Portugal's very popular Non-Habitual Resident (NHR) Regime will close to new applicants from 1 January 2024, says Rachel de Souza, private tax client partner at RSM.
Since 2009, Portugal has been a popular location for many wealthy individuals due to the very generous tax breaks that the NHR regime offered. Broadly, no foreign income is taxed except foreign pension income, which is taxed at 10%. This low tax approach has attracted individuals from all across Europe, not just from the UK.
So where will taxpayers now look to go?
Taxpayers may be pleasantly surprised to learn that there remain a host of options in Europe as well as further afield. The UAE, and Dubai in particular, offers a zero tax regime, and although the heat and distance may be off-putting for some, others enjoy Dubai as a lifestyle destination.
Closer to home, Italy has become more popular since it introduced a Swiss style ‘forfeit' in 2017. Under a forfeit regime, a fixed amount of tax is paid to cover all foreign income, whether that amount is £3,000 or £30 million. Italy has pitched its annual forfeit at €100,000. So if we assume a UK tax rate of 45% for comparison purposes, if you have non-Italian source income of over €222,222, moving from the UK to Italy might be attractive.
Greece introduced its forfeit in 2019, also set at €100,000 a year. In this case, applicants have to invest €500,000 in Greece, although as this includes investment in real estate, buying a house should enable you to meet this condition.
In 2020, Greece introduced a new regime for those who are in receipt of pension income arising outside Greece. Under this regime, on becoming Greek resident, all foreign source income (ie not just the pension income) will be taxed at 7%.
There are other options too. Both Ireland and Malta offer a regime modelled on the UK's historic non-dom system. Under these regimes, your pre-arrival wealth can be spent in the country tax free, and you don't pay any tax on foreign income and gains as they arise, as long you don't spend those funds in the country of residence.
How about Cyprus? If you are not Cypriot domiciled, dividend and interest income is generally received tax free, and foreign pensions in respect of services carried on outside of Cyprus are taxed at only 5%.
Care is still required when selecting where to go. Capital gains are not covered under all of these privileged tax regimes, and you could end up being worse off. As an example, the top Portuguese capital gains tax (CGT) rate is higher than the standard UK CGT higher rate. Therefore, if you relocated there in the expectation that you would pay zero tax on your foreign capital gains, you may be surprised to discover that not only will you be taxed, but your tax bill may be higher than what you would have paid if you stayed put in the UK.
Practical factors shouldn't be forgotten. Another reason for Portugal's popularity is that residence for tax purposes is not solely based on physical presence, whereas in many countries, you will be required to spend at least half the tax year physically present to be considered tax-resident there.
In practice, taxpayers will need to consider their lifestyle needs just as much as their tax requirements when thinking about where they should base themselves.
By Rachel de Souza, private tax client partner at RSM.
