What a difference a week makes! A month, well that is life-changing. Three months, an eternity for tax.

As recently as six months ago, it was unquestionable that Portugal was among Europe’s best investment destinations. For seniors or retirees, it was the uncontested number 1: a growing economy; falling unemployment; a rapidly recovering real estate market; a real estate investment surge driven primarily by the very successful Golden Visa program; a wave of (mostly) wealthy foreign retiree immigration driven by the Non Habitual Resident program; and all this fuelled by 8 successive record-breaking years in the tourism industry.

However, since then, the government has insisted on a strategy of (not-so-gradual) assault on those perceived to be wealthy. And, unfortunately, as houses and apartments elicit a much more visceral response than pieces of paper known as shares or even a pile of intaglio paper known as money sitting in bank coffers, the government has set its sights firmly on ensuring that all those who own real estate pay for the right to bring investment into the country.

It started with what appeared to be a notion so ridiculous that it would be impossible to implement: taxing a “good” view. What was a good view? A sea view: definitely. A golf view: most probably. A country view: well, we know the countryside, under threat, may be considered a scarce resource. So that will probably come into play. Surely not a warehouse: well, under normal circumstances no one would think such an absurd thought. But these are not simply warehouses your house overlooks: they are refurbished historical buildings which are part of one of Europe’s most successful regeneration projects. So, yes, warehouses are probably in. In consulting it is called scope creep.

tax The Algarve’s golden-sand beaches are but a small part of the Golden Visa program’s attractions

Now, all owners of real estate in Portugal know they will be taxed more via their IMI (municipal tax) but they have no idea of who decides, as least subjectively as possible, how good their view is. Is it perhaps too much of a coincidence that this increase comes at a time when many owners requested the official revaluation of their properties (only possible every 5 years) after falling construction prices, which saw a sudden drop in municipal tax revenue?

That followed closely on ongoing chatter that inheritance tax would be implemented in the next budget. A strong call for wealth redistribution pervades the conversation and as the long-suffering Portuguese citizen is well aware, when a rumour hits the airwaves, it is certain that the details are already being ironed out.

Then came the wealth tax. Weeks in the publishing, but one suspects cooked to perfection over a long period of time. An absolute uproar that a far left party had made a “suggestion” about taxing property. But within days it was hailed as a constitutional breakthrough eschewing the principles of equality.

Surely, all wealth would be taxed in the same way? Wrong, only property.

But what about property that had debt on it and which was being repaid by the owner? The answer was swift: everyone knows that official property values are well below actual property values. It seems that the members of parliament have not yet had the chance to visit one of the many golf course developments scattered around the country where frequently the opposite occurs.

But what if my neighbour owns stocks, shares and stockpiles his cash? Clever neighbour indeed…

Who will it affect? The “wealthy” of course. Anyone with real estate worth more than €600,000 (double the exemption for married couples).

What about primary residences? First and second homes will be exempt, was the government’s first response. One week later, an announcement that a sliding scale mechanism would be implemented, with no first and second home exemptions.

Our prediction: the exemption limit will fall to €500,000 and the government will embark on an upward home revaluation program.

While investors and owners rushed to legalise or register their investment properties under the AL (local lodging) law, spurred on by a threat of prosecution and a legion of tax advisory and consulting firms eager to capitulate on a new revenue stream, the “dark” side of the law began to emerge:

  • the government can charge CGT on what is now considered a business, if you decided to cancel your AL license;
  • a continued prejudicial regime favouring short-term lettings over long-term lettings, the latter subject to an effective tax rate of around 7 times that of short-term letting (although recent changes now mean that this difference is only around 2.5 times);
  • a creeping up of IMI based on the notion of “lettable” properties (which conveniently were now easily identifiable by virtue of their registration under AL);
  • and the latest uncertainty which has assailed owners who are not, despite what the government may say, professional landlords: the apparent need to withhold government taxes, in addition to dealing with VAT, for values over €10,000 per annum, meaning complex accounting which is contrary to the “simplified” regime which was launched as a motif for the law.

Add to this the fact that the country will almost certainly implement a IHT or inheritance tax (and even those who have gifted assets in life are under threat of IHT being applied retrospectively), and in six months Portugal has seen uncertainty caused by a change of the real estate fiscal environment on parallel with Brexit in the UK.

With all this going on, it is no surprise that until some sense of stability or normality returns, clients looking to make the most of the positive personal taxation environment will continue to seek long-term rental solutions that currently do not have any of the disadvantages of a property purchase.

Compare listings