Portugal Property

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Portugal Property: Buying a Property in Portugal

Date: 16/9/2008

Why Portugal?

Attracted by the temperate climate, friendly people and ease of travel from the UK, many British people have chosen Portugal as the location for their second home or even moved there permanently.

Since 1993, when revised planning regulations were introduced, new building has declined, causing property prices to rise (at around 15–20 per cent per annum in recent years) but also helping to ensure that new developments blend with their surroundings.

Property prices vary but are generally higher than in Spain, owing to higher land costs and generally superior quality. For those willing to renovate, it is still possible to find older properties inland at very reasonable prices.

Portugal also seems to have weathered the troubles affecting the property market in Spain well, and has continued its steady and sustainable growth. Strict laws have also avoided the planning irregularities that have plagued its neighbour, while new areas opening up along the Atlantic coast are providing the impetus for further growth.

Popular property locations in Portugal

Traditionally, the Algarve has been the first choice of British people purchasing second homes in Portugal. However, the resulting heavy demand and consequent rise in property prices are leading to increased interest in other, more northerly areas, principally the Silver Coast and the Costa Verde, where tourism is not yet as developed as it is in the Algarve and major transport and infrastructure improvements are being undertaken.

Property in The Algarve

The Algarve has long been a favourite with British holidaymakers and is now one of the most popular locations for those buying a second home abroad. This is a relatively expensive area, owing to consistently strong demand, which results from rising property prices, potential for year-round rental income (a consequence of its favourable climate) and the strict planning regulations that have helped the Algarve to remain relatively unspoiled in comparison with, for example, some coastal areas of Spain. However, there are homes to suit most budgets, depending on location. Districts around Lagos in the west and small towns in the east are still inexpensive compared with more central areas.

The extension of the A22 motorway, which now runs along the entire Algarve coast, is making the western Algarve far more easily accessible than it used to be. Capital appreciation there is expected to be rapid, while development is remaining under control.

Silver Coast property

Located in central Portugal, between Porto and Lisbon, the Silver Coast is home to some of the country's most impressive architecture and historical and religious sites. On the coast are largely-deserted beaches and quaint fishing villages. Inland, fertile countryside stretches along the banks of rivers like the Tagus, producing abundant livestock and crops. However, though peaceful, the area is not cut off, as Portugal’s main motorway, the A1, crosses it from north to south.

Previously, the Silver Coast was largely untouched by the overseas property market. Consequently, prices were below Portugal’s average. However, the Silver Coast is now the focus of much of the development going on in Portugal, with the same controls and protection for the environment in place as elsewhere in the country.

Capital growth is some of the highest in Portugal, with improved transport networks helping to attract increasing numbers of buyers.

Costa Verde (Green Coast property)

Located in central Portugal, between Porto and Lisbon, the Silver Coast is home to some of the country's most impressive architecture and historical and religious sites. On the coast are largely-deserted beaches and quaint fishing villages. Inland, fertile countryside stretches along the banks of rivers like the Tagus, producing abundant livestock and crops. However, though peaceful, the area is not cut off, as Portugal’s main motorway, the A1, crosses it from north to south.

Previously, the Silver Coast was largely untouched by the overseas property market. Consequently, prices were below Portugal’s average. However, the Silver Coast is now the focus of much of the development going on in Portugal, with the same controls and protection for the environment in place as elsewhere in the country.

Capital growth is some of the highest in Portugal, with improved transport networks helping to attract increasing numbers of buyers.

Costa Verde (Green Coast property)

Portugal’s Costa Verde (not to be confused with Spain’s) covers the districts of the Minho and most of the Douro Litoral, extending north from Porto, the country’s second largest city, to the Spanish border and some way north of Viana do Castelo.

As its name (translating to Green Coast) suggests, this is a region of rolling hills and fertile valleys, where agriculture prospers owing to the year-round heavy rainfall that makes this the greenest part of Portugal. The National Park of Peneda-Gerês, with its dramatic scenery and rich variety of flora and fauna, is situated on the Costa Verde.

Property prices in this region are the cheapest in Portugal, the best bargains being found inland rather than on the coast.

Buying a property in Portugal

The purchase process

Following a verbal agreement, the purchaser’s lawyer ensures that the title deeds and other documents, including the caderneta urbana, which defines the property’s size, boundaries and rateable value, and the habitation licence, which demonstrates its compliance with building regulations, are in order.

The local tax office then issues a Fiscal Number, and buyer and seller agree a provisional contract, which details the terms of the sale. A deposit (usually 10 per cent of the purchase price) is paid. Once the provisional contract’s conditions are fulfilled, both parties sign the final contract in the presence of a Notary Public and the balance of the purchase price is paid. The notary records the transaction with the Land Registry and files the caderneta urbana with the tax office.

Property Fees and Taxes

Several fees and taxes are payable when buying property in Portugal. These generally amount to between 10 and 15 per cent of the purchase price and may include:

• transfer tax (resale properties only)

• value added tax (new properties only)

• notary’s fees

• legal fees

• deed registration fee

• surveyor’s fee (optional)

• mortgage fees (if applicable)

• utility fees (new properties only)

Most fees are based on the declared, or fiscal, value of the property, which was traditionally much lower than the actual price paid, to minimise tax. However, the fiscal value of most properties has been recalculated in recent years and there are harsh penalties for buyers who declare a price considerably below actual market value.

Declared Values

In the past there has been a culture of under-declaring the value of resale property, in order to cut down on the capital gains tax for the vendor and other fees due on property sale. Please be aware of the possibility that some private vendors will insist on doing this to cut their liability, and in many cases it is a deal-breaking point.

No matter what the vendor says, this is illegal and as the authorities take more of an interest in property transactions there are stiff penalties for those who are caught. Even if you were to get away with under-declaration on buying the property, the strong likelihood is that you will be stung for the difference in capital gains when you come to sell.

Portuguese Property Mortgages

• transfer tax (resale properties only)

• value added tax (new properties only)

• notary’s fees

• legal fees

• deed registration fee

• surveyor’s fee (optional)

• mortgage fees (if applicable)

• utility fees (new properties only)

Most fees are based on the declared, or fiscal, value of the property, which was traditionally much lower than the actual price paid, to minimise tax. However, the fiscal value of most properties has been recalculated in recent years and there are harsh penalties for buyers who declare a price considerably below actual market value.

Declared Values

In the past there has been a culture of under-declaring the value of resale property, in order to cut down on the capital gains tax for the vendor and other fees due on property sale. Please be aware of the possibility that some private vendors will insist on doing this to cut their liability, and in many cases it is a deal-breaking point.

No matter what the vendor says, this is illegal and as the authorities take more of an interest in property transactions there are stiff penalties for those who are caught. Even if you were to get away with under-declaration on buying the property, the strong likelihood is that you will be stung for the difference in capital gains when you come to sell.

Portuguese Property Mortgages

Purchasers needing finance for their property purchase have the choice of remortgaging their UK home or arranging a mortgage on their Portuguese property through a Portuguese or UK lender. Remortgaging offers the easiest route. Releasing equity in a UK home means that the second home can be purchased for cash, without the need for another mortgage. However, this option may only be feasible for those who own their first home outright.

Mortgages can be obtained through Portuguese lenders for purchase, re-financing and home improvements. A number of UK mortgage providers will lend funds of up to 80 per cent of the purchase price for second home purchase over, typically, a 15-year term. Portuguese providers will lend the same amount over a five- to 25- year term.

Euro mortgages

Euro mortgages, which are tied to the rate set by the European Central Bank (ECB), currently lower than the Bank of England base rate, may seem an attractive option, and several UK lenders offer them. However, because of the volatility of the currency markets, a euro mortgage may not be the best option for many people, who cannot afford to lose heavily should the currency move against them. Recent fluctuations have put the value of the Euro against Sterling much higher, to the cost of UK buyers.

The fact that the ECB’s base rate is at present lower than the Bank of England’s does not guarantee savings on repayments for those taking out a euro mortgage. As the UK mortgage market is competitive, there are many good deals available on sterling loans, so it is wise to shop around. The services of an experienced IFA should enable you to get the best deal for your circumstances.

Portugal's tax system

Portugal’s taxation system is similar to the systems of other EU countries. There is a double taxation agreement between Portugal and the UK.

Personal taxation: non-residents

In general, non-residents are only subject to income tax on income sourced in Portugal, for example, interest paid by Portuguese banks. They may also be liable for value added tax, wealth tax, capital gains and inheritance tax, according to individual circumstances.

Non-residents must complete an annual income tax return if they receive income from letting property. Such income is taxed at a flat rate of 25 per cent. In Portugal, only repairs and maintenance costs are tax-deductible. Deduction of mortgage interest against rents, permitted by some other countries, is not allowed.

Personal taxation: residents

Residents of Portugal are subject to taxation on worldwide income, capital gains and inheritances. For tax purposes, a foreign national staying in Portugal for more than 183 days during a tax year (January 1 to December 31) is considered a resident. The 183 days need not be consecutive. Residents of Portugal are also subject to other taxes, including value added tax, vehicle sales tax, stamp tax, rental property tax and taxes on real estate transactions.

Local taxes

Collected annually, Contribuicao autarquica is a municipal property tax calculated according to a property’s registered value and the local services available. For rural properties, it is currently 0.8 per cent and for urban properties between 1.1 and 1.3 per cent.

Inheritance tax

Upon presentation of the appropriate documentation, inhertiance tax (known as Stamp Tax in Portugal) is not payable when a property is passed to a member of your immediate family. For this reason, it is recommended that you make a specific will upon arrival in Portugal.

As with anything which is so technical, we would advise you engage as specialist in international taxation to make sure that while your liability is covered adequately, you are not paying more than you should. Passports, visas and residency

 

Passports and visas

EU citizens must be in possession of a valid national identity card or passport to enter Portugal. It must be valid for the duration of their stay, which can be up to 90 days. A visa is not required.

Residency

Portugal does not require EU citizens (including British nationals) to have residence permits. They can, however, be useful in certain circumstances (when applying for a driver’s licence, for example, or for tax purposes) as official proof of residence. A short-term residence permit is valid for stays of between 90 days and a year. A long-term permit is valid for five years, after which it may be renewed automatically for a further five years. After that, applicants must apply in person for renewal.

The Portuguese economy

Portugal has enjoyed one of the EU’s fastest-developing economies over the past few years, thanks in part to almost 23 billion euros of EU funds, which are helping to transform its transport infrastructure, opening up new areas to tourism and the international housing market.

In recent times, successive governments have privatised many state-controlled firms and liberalised key areas of the economy. Portugal has become a diversified and increasingly service-based economy, with the services sector now supplying nearly two-thirds of its GDP. Agriculture contributes around 6 per cent and industry the remainder. Key exports are machinery and equipment, clothing, wood and cork, footwear, mining equipment and wine.

Relationships with the UK have always been good. The UK is one of Portugal’s largest foreign investors.

Portugal property: Investment potential

Although Portugal is seen as one of the most established overseas property markets in the world, it is also seen as a much better investment prospect than many of the newer ‘emerging’ markets. In fact, A Place in the Sun recommended it as the best place in world to invest in property a couple of years ago, based on the rental return and projected capital appreciation over ten years.

As the rental potential for buying property in Portugal makes up a large part of the investment attraction for British buyers, it is worth considering the possible obstacles that need to be overcome before you can begin to earn money. All property in Portugal that is rented out to holidaymakers must be inspected by the local authorities for safety and security, and you will have to provide details of the appropriate insurances for the permit.

 

If you are buying a run-down country property for renovation, you should also be aware of the planning laws in Portugal. For most residential properties, in rural areas especially, building is only permitted on the footprint of structures that are already on-site. There are some further restrictions and exceptions to this, and the local town hall planning department will be able to advise you of the specifics as well as any other local differences.

And finally...

Buying a home abroad is a major decision and one that should not be taken lightly. It is vital to ensure you have researched all aspects thoroughly and have all the relevant facts. Individual circumstances will vary widely, so it is essential to obtain professional advice and guidance tailored to your particular situation, especially in areas such as property purchase, potential rental returns, taxation and mortgages.

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