In the extract below, taken from the latest newsletter from the National Association of Local Lodging Establishements, NALLE, its author Dennis Swing Green looks at Capital Gains Tax and the allocation of an asset.
The same members' newsletter looks at the distinction between local lodgings and residential lettings, where local lodging income is taxable, compliance in the light of more changes in the regulations and the simplified tax regime.
If you let your property, you should have specialist advice as it no longer is OK to ignore the rules and not to declare rental and lettings income as penalties can be stiff and unavoidable. NALLE's contact details are below.
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Aaron and Bobby: an illustration
Underlying the tax treatment of the allocation of an owner’s asset to a business activity is the difference between the transfer of a property (transferência onerosa), representing a change of ownership or conveyance of property rights, giving rise to Capital Gains assessment, versus a transformation of usage of a property or the alteration of a property’s utilisation from residential to commercial (or visa versa), which does not trigger CGT. (CIRS Article nº10)
Example nº 1: Aaron
Aaron buys an apartment in Portugal for €100,000. He and his family use the flat when on holiday. After 10 years, he sells the property for €110,000, realising a gross gain of €10,000. As a non-resident, he is liable for Capital Gains Tax in Category G at the rate of 28% after deducting allowable expenses and adjusting for inflation.
Aaron buys an apartment in Portugal for €100,000. He and his family use the flat when on holiday. After 10 years, he sells the property for €110,000, realising a gross gain of €10,000. As a non-resident, he is liable for Capital Gains Tax in Category G at the rate of 28% after deducting allowable expenses and adjusting for inflation.
Example nº2: Bobby
Bobby also buys a flat for the same purchase price of €100,000 at the same time. Five years later, he decides to let his apartment to holidaymakers (Local Lodging). Bobby registers as a Sole Trader under Category B, exercising a tourist activity (CAE 55201) in the Simplified Regime. Because he uses the apartment for his tourist business, he must declare the allocation of the asset (afectação) and its market value – now appraised at €105,000 – on his Portuguese “IRS” income tax return in Annex B. Although the asset has now changed use from residential to commercial, there is no transfer of ownership. No Capital Gains Tax arises at this point.
Another 3 years pass and Bobby resolves to stop letting and use the property again for family holidays. He declares the current market value: €108,000. The €3,000 gain occurs under Category B but no tax is due. Once again, while the usage changes, the return to residential occupancy does not constitute a chargeable event because there is no transfer in ownership or property rights.
Bobby also buys a flat for the same purchase price of €100,000 at the same time. Five years later, he decides to let his apartment to holidaymakers (Local Lodging). Bobby registers as a Sole Trader under Category B, exercising a tourist activity (CAE 55201) in the Simplified Regime. Because he uses the apartment for his tourist business, he must declare the allocation of the asset (afectação) and its market value – now appraised at €105,000 – on his Portuguese “IRS” income tax return in Annex B. Although the asset has now changed use from residential to commercial, there is no transfer of ownership. No Capital Gains Tax arises at this point.
Another 3 years pass and Bobby resolves to stop letting and use the property again for family holidays. He declares the current market value: €108,000. The €3,000 gain occurs under Category B but no tax is due. Once again, while the usage changes, the return to residential occupancy does not constitute a chargeable event because there is no transfer in ownership or property rights.
Finally, two years later, Bobby decides to sell the apartment and buy a villa. The sale triggers Capital Gains assessment. However, rather than a simple, straightforward calculation based on the net difference between the purchase and sale prices in Category G, as was the case with Aaron’s flat, Bobby’s assessment is calculated in stages:
Years 1-5: under Category G, on the net difference in value between the date of purchase to the date of allocation of the property to the business activity;
Years 6-8: under Category B, from date of business allocation to the date of re-allocation to private residential use;
Years 9-10: once again under Category G, from the re-allocation to residential use to the date of final sale.
Stages nº 1 and nº 3 are taxed at 28% in Category G on the full net gain.
Stage nº 2 is assessed at 25% in the Simplified Regime based on 95% of the net gain.
Stage nº 2 is assessed at 25% in the Simplified Regime based on 95% of the net gain.
The Calculations
Putting aside similar deductible expenses and the cost of living adjustment over the 10 years in order to simplify the comparison, the numbers line up as follows:
Putting aside similar deductible expenses and the cost of living adjustment over the 10 years in order to simplify the comparison, the numbers line up as follows:
Aaron:
€110,000 - €100,000 X 28% = CGT due in year 10 = €2,800.00
€110,000 - €100,000 X 28% = CGT due in year 10 = €2,800.00
Bobby:
Stage 1: Category G: (€105,000 - €100,000) x 28% = €1,400.00
Stage 2: Category B: (€108,000 - €105,000 x 95%) x 25% = € 712.50
Stage 3: Category G: (€110,000 - €108,000) x 25% = € 500.00 CGT
due in year 10 total €2,612.50
Stage 1: Category G: (€105,000 - €100,000) x 28% = €1,400.00
Stage 2: Category B: (€108,000 - €105,000 x 95%) x 25% = € 712.50
Stage 3: Category G: (€110,000 - €108,000) x 25% = € 500.00 CGT
due in year 10 total €2,612.50
Although more complicated, Bobby achieves a savings of €187.50 (+6.7%). This bit of tax relief is unlikely to be perceived by most owners as either a deterrent or an incentive in most cases. Nevertheless, although difference in the bottom line is not significant, compliance procedures still must be followed.
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What is NALLE?
The mission of the National Association of Local Lodging Establishments is to provide information and support to its members, enhance security and compliance in Local Lodging operations and provide collective representation to all of those engaged in Local Lodging in Portugal.
Representation – a collective voice
We defend the interests of Holidaymakers, Property Owners, Agents and Property Managers engaged in Portuguese Local Lodging. We provide an integrative, representative voice to work with policy makers, government officials and tourist interest groups to find solutions that respond to all concerns.
Sound information – the basis to be compliant
We provide our members with accurate, up-to-date information and keep them current with ever-changing legislation
Rua António Maria Cardoso 15, 4º D
1200-273 Lisboa
tel: +351 96 2851551
e-mail: info@nalle.pt
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