The Benefits of Reinvesting Profits from a Property Sale into a Life Assurance product

Mafalda Cesário | Head of Tax and Legal – Portugal and Brazil | Utmost Wealth Solutions?

Did you know that Article 10 of the Portuguese Personal Income Tax Code can exempt the tax from the gains of the sale of a main home, if the proceeds are placed into a life assurance policy?

In this article, I use a simple case study to demonstrate how this can work and the resulting benefits that can be achieved for the client. First, let us look at the conditions that need to be satisfied in order to take advantage of the tax exemption:

1. The individual or spouse at the time the main home is sold is retired or has reached 65 years of age.?
2. The life assurance product needs to be bought within six months after the sale of the main home.
3. The product’s exclusive purpose is to allow the policyholder, or the spouse, to obtain a regular payment for a period of 10 years or more.
4. The annual total of regular payments cannot exceed the annual maximum of 7.5% of the invested amount.

A life assurance product, such as APEX Portugal from Utmost Wealth Solutions, can help satisfy the requirement of setting-up regular payments that do not exceed the annual maximum amount of 7.5% of the invested amount, during the required 10 year period.*

This can be of benefit to expatriates living in Portugal who are looking to change their main residence. The following short case study explains how this can work in practice.

THE CLIENT

Ron is 70 and married to Liz who is 64. They have enjoyed a successful career in property development in the UK. They retired to the Algarve in 2015 and at the time purchased a large villa for €1.5m.

As their family have grown older, Ron and Liz have now decided to downsize. They continue to own several other properties so are keen to maximise their return on investments. However, they prefer to find ways of saving tax whilst remaining in control.

THE SOLUTION

In 2023, Ron and Liz decide to sell their property for €3.5m and buy a smaller property for €1m.

Ron and Liz obtained tax advice in Portugal that confirmed the above conditions (1 – 4) were met, and they invest €2.5m into an APEX Portugal life assurance policy.

THE BENEFITS

The benefits to Ron and Liz are as follows:

• They will not pay Capital Gains Tax on the €2.5m gain from the sale of the main house, as the €2.5m will be reinvested into a life assurance policy.
• Ron and Liz receive €125,000 per annum (5%) from their APEX Portugal policy to supplement their income.
• The balance of €1m will be used to purchase their new main house.
• If Ron and Liz ever move back to the UK, their APEX Portugal policy will allow them this flexibility in the future.

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* In our view, this should meet the requirement and intention of test 3 above. However, this is a subjective test which has not been tested in the Courts of Portugal and the use of the word “exclusive” is a high threshold to satisfy. Therefore, the Portuguese Tax Authorities may seek to challenge certain cases depending on individual fact patterns.

This article has been published by Utmost PanEurope dac. It does not constitute tax or legal advice and is based on our understanding of the relevant legislation as at May 2023. Utmost PanEurope dac?(No. 311420) trading as Utmost Wealth Solutions, is regulated by the Central Bank of Ireland. Its registered office is Navan Business Park, Athlumney, Navan, Co. Meath, C15 CCW8, Ireland.