CGT: Older Properties and Unauthorised Improvements
Many property owners who acquired their homes in Portugal in years gone by face a common dilemma: they bought at a time when real estate was dirt cheap. These houses were often primitive and in poor condition, requiring substantial renovations.
In those days, it was common practice to do the work and worry about the formalities later: no building permits, no formal plans, no invoices issued or kept. In addition, the Rateable Value (“VPT”) remained low, sometimes too low to tax!
Today, the situation has inverted. Valuations and tax appraisals have skyrocketed. Unauthorised alterations require planning permission prior to sale. Low deed prices and low Rateable Values can mean a whopping Capital Gains tax assessment upon sale.
If you are resident in Portugal, there are two conventional assessment options for Capital Gains:
one half of the capital gain can be excluded. The other 50% of the adjusted net profit is added to overall income for the fiscal year and taxed at marginal rates. Properties purchased prior to 1989 are exempt for Capital Gains Tax.
Alternatively, the gain may be rolled over if another principal residence of equal or greater value is purchased between 24 months prior and 3 years after the sale. For newly acquired properties of lesser value, the gain is calculated on a pro-rata basis. The rollover can be anywhere in the EU, not just in Portugal, as long as it becomes your principal residence. These options are not available to non-residents whose CGT is based on the full gain.
In some cases, the problem can be mitigated or completely resolved by “killing two birds with one stone”. First, have architectural plans drawn up and building permits issued for any unrecorded improvements. Then, upon “completion” and inspection, the old “matriz” (tax registration) can be struck off and a new one assigned, along with a revision of the property’s Rateable Value. This new “matriz” will serve as the base when you finally sell your property, substantially reducing your CGT liability as well as sorting out the bureaucratic “skeletons in the closet” that can make your property difficult to sell. Example: The Smiths bought and renovated an old farmhouse in the mid-1980s with little or no paperwork to show for the improvements that they made. While today’s selling price is €500,000, most of the proceeds of the sale will be seen as a Capital Gain.
To achieve a much-needed update in bureaucratic formalities and a significant “VPT” uplift, they apply for building permits and subsequent inspection. Their old “matriz”, with an original “VPT” of just €50,000, is struck off and a new registration approved at over €375,000, leaving them with a far more manageable CGT bill to settle.
Capital Gains Tax on the property can be a complicated matter with many permutations. The basic guideline is quite simple: Plan Ahead! Leaving your queries to the last minute makes the worst case scenario an almost inevitable outcome. By anticipating possible events, you can take timely action to minimise your future assessment.