Buying property in Portugal is quite straightforward and similar to buying property in any other foreign country. Above all else it is vitally important that you instruct the services of a reputable lawyer and notary.
When you have decided on your purchase you will normally be asked to sign a promissory contract and pay a deposit. If you withdraw after this you may forfeit the deposit. If the vendor withdraws he may have to compensate you.
If you are buying ‘off-plan’ from a new development under construction, you are normally required to pay the purchase price in stages.
The deposit paid, your lawyer should then run the necessary checks. In the past it has been quite normal for Portuguese property not to have a title deed or to be sold by someone who is not the legal owner. This is changing, and certainly these types of problems should not arise with a new development.
Your reputable lawyer therefore needs to check that:
Once all the necessary searches have been carried out and you are satisfied, the lawyer will arrange for any fees and taxes to be paid and for the title deed (escritura) to be transferred into your name and registered with the Portuguese Government Land Registry.
The escritura includes a detailed description of the property as well as carrying the name of the person legally owning it, and needs to be signed by the purchaser and vendor in front of a notary. If you cannot be in Portugal to attend the signing you can give Power of Attorney to your lawyer instead providing all parties agree. The importation of funds to buy the property usually needs to be recorded with the Portuguese authorities.
The notary is a public official who is there only to put on public record the fact that the title deed documenting the transfer of the property has been signed in the notary’s presence and understood by all parties concerned. When the escritura is signed in front of the notary, either the funds are handed over in his presence, or the vendor confirms that the money has already been received. Proof of the payment is incorporated into the title deeds.
The charges made by the lawyer in dealing with the basic legal administration in the purchase of property that already exists is usually 1% of the purchase price subject to a minimum charge of around €1,100. If the property is under construction, or there is extra work that the lawyer undertakes, a further charge may be made. Extra work may include negotiations concerning the price, sorting out any problems with the title deed and dealing with utility companies.
VAT (IVA in Portugal) at the standard rate of 23% will be charged on estate agent, legal and survey fees, and on all purchases of building materials as well as the builder’s fees if you build or extend a property.
The notary’s fee will vary. A fee is also payable to the land registry. Together, these fees typically amount to between 1.5% and 2% of the value of the property.
A purchase tax, Imposto Municipal sobre Transmissôes Onerosas de Imóveis (IMT) of between 0% and 8% (depending on the declared value of the property or the registered Valor Patrimonial – VP) is payable by the purchaser of residential property. The calculation of this tax is not straightforward, but properties valued at up to €115,509 are exempt, while the rate applicable to properties valued at over €688,544 is 6%. For properties registered Offshore and sold Offshore (share transfer), IMT is not applicable as there is not a property transfer only a share transfer.
There is an annual municipal tax (similar to UK Council Tax) called Imposto Municipal sobre Imóveis (IMI), based on the VP and fixed by each municipality.
Any property (onshore or offshore) with a rateable value of less than €1 million will pay the normal IMI rate of 0.4% on the rateable value. If the rateable value is over €1 million than there is an extra penalty of 1% which mean a total of 1.4% IMI tax on the rateable value. The IMI percentages are always calculated on the rateable values and not on the sale price.
It has long been common practice in Portugal for the purchase price of a property to be under-declared. This is illegal and the Portuguese authorities will eventually eradicate it. Meanwhile if you are pressured into buying this way, it is best to avoid getting involved. It will probably not save you anything in the long run (and could in fact increase any future capital gains tax liability), and if it is discovered, you could be subject to penalties.
If the authorities suspect that the purchase price has been under-declared they have the option to compulsory purchase at that price.
VPs still bear little resemblance to the real market value of a property and are being systematically reviewed, especially when a transaction occurs. The new VP values will follow a formula that takes into account criteria such as size of the property, the location and quality of build. In many cases the increase in registered value will be substantial.