My attention was recently drawn to newspaper article criticising Stephen Hammond MP for attempting to "avoid taxes" by purchasing his Portuguese property through a company. This makes an interesting story and a good way to have a pop at a high profile MP but the criticism is ill-founded and wrong. 

Throughout the 1980s and 1990s the favoured way for non Portuguese to purchase Portuguese property was through an offshore company. This was particularly true of the many UK expatriates and UK resident holiday home buyers. Gibraltar and the Channel Islands tended to be the jurisdictions most frequently used due to their proximity to Portugal and readily available expertise.

There were very good reasons for purchasing this way. The idea is that a re-sale of the Portuguese property is achieved by transferring the shares in the company rather than by transferring the property itself.  This saves all relevant sales and transfer taxes which would normally be payable in Portugal. Over the years the amount of these has varied considerably. They are about 6% of the property value at the moment but have been as much as 15% in earlier years. It also means that capital gains tax is not payable..... .....in Portugal.

An additional advantage is that because the company never dies all succession laws in Portugal and estate taxes are avoided. Over the years estate taxes in Portugal have been quite high but were abolished some time ago for all death transfers to relatives but it is rumoured that such taxes may be reintroduced.

Transferring the shares of the company to effect a resale allows the buyer of the shares to avoid sales taxes and transfer costs in Portugal which would otherwise be payable on purchase of the property itself. In theory this allows the seller to charge more or offer a discount on the normal costs. All very excellent and completely in accordance with all applicable laws in Portugal and the UK.

In 2002, to claw back some of these lost costs Portugal introduced an annual tax for all companies which owned property in Portugal and were incorporated or resident in places on a "black list". This included all the usual offshore suspects and certainly included Gibraltar where Mr Hammond's company was incorporated. This annual tax could be avoided by redomiciling the company to a place which was not on the black list. Redomiciling is a procedure whereby a company "moves" from its place of incorporation to another jurisdiction retaining its corporate history but obtaining a new identity. Mr Hammond's company was redomiciled to Delaware and thereby avoided the annual tax as Delaware, USA is not on the black list.

So that is the good news. The bad news for Mr Hammond is that if the property is sold Mr Hammond's company would pay taxes in Portugal.  The UK/Portugal tax treaty clearly gives the taxing right on a sale of Portuguese property to Portugal so all of the taxes he could avoid in Portugal by transferring the shares instead of the property would apply and be payable by the company rather than by Mr Hammond personally. So no taxes or other costs are avoided.

On the other hand if the sale is made by a transfer of the shares capital gains tax will be due in the UK. The CGT rate in Portugal is 25% but 28% in the UK so actually all that has been achieved here is the tax bill has been shifted from Portugal to the UK and actually increased - not avoided at all. The increase in the value of the shares would presumably be exactly the same as the increase in the value of the property.  In short, Mr Hammond isn't avoiding capital gains tax as reported in the article but rather is ensuring that capital gains tax is paid in the UK rather than in Portugal to the ultimate advantage of the UK taxpayer and the ultimate disadvantage of the Portuguese taxpayer.

Additionally Mr Hammond's estate would be subject to UK Inheritance Tax (IHT) at 40% so although he avoids estate taxes in Portugal he would pay them in the UK at a much higher rate.

The Portuguese might complain about losing revenue but as far as I know the UK exchequer is not complaining about the extra contribution. I suppose it would always be possible for HMRC to write a cheque and send it to our old allies and fellow EU members in Portugal to help them out in these straightened times!

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