There have been people doing this for a long, long time, and again with so many other considerations whilst buying a property abroad, making sure you chose the right company is paramount. And it's for this exact reason that we decided to open a Property Management division to help our client's with the most important part of owning a property.
Since December of 2014, there have been some sweeping changes to the legislation and tax laws regarding rental properties and the income they generate. Although there has been some conflicting advice from the finance sector concerning how these changes are put into effect, generally speaking, they are actually rather sensible and cost-effective for most clients looking to make income from their property.
The major changes in the law require that all properties that are being rented out on a nightly basis (i.e. rents of less than 30 days at a time) and advertised and licensed as such by registering the property as an Alojamento Local (local lodging). Comply with a number of simple health and safety regulations (which is included in our IRG Property management pack) all of which are rather sensible. Installation of fire extinguishers, first aid kits, emergency telephone numbers along with inspections to the electricity and gas supply.
As well as obtaining this license, you are required to register with the financas (tax authority) via a Business Activity Registration, which your management company or fiscal representative can do with you, or on your behalf. This is the key part of the new Alojamento Local system.
The most important part of many client's purchases and something that is pivotal in making property work for its owners. Many owners are happy to rent out just during the peak summer months which is generally enough to cover the properties annual running costs and a fairly stable rental period. Leaving the other 10 months of the year free for owner's to enjoy at their convenience. In many properties, these weeks will be enough to cover the annual running costs of the property.
The rental season is the Algarve is concurrent with the large European school holidays, with July & August offering the peak rental incomes on a weekly basis. Easter, the Half-term(s) and Christmas (to a degree) also offer the chance for peak rental rates. All in all these periods can offer an owner up to 20 weeks of rental potential. Of course, the Algarve is popular for golf year-round (except the summer) so there is the potential to bolster these weeks with additional income at any time of the year, with a competitive pricing structure.
Although it is unlikely you will rent the property out every week of the 20, a 10 - 15-week rental year would be common for most properties. With a shift towards winter lets in recent years, those wishing to increase their rental returns might look at a 3 - 6-month winter let. The monthly rental figures are of course much lower than the peak summer weeks, however with the tennant, in most cases, covering the utility bills, running costs are kept to a minimum and if the property is empty it can be a good source of extra income.
Under the reformed tax regime for income tax on rental properties the simplified tax payment (Category B) scheme is, for most owners, going to be the more beneficial.
Category B Tax (invoices issued by, or in the name of the owner(s))
65% of declared income is automatically deducted as expenses whilst income tax is then paid on the remaining 35% only.
The alternative is Category F Tax (invoices issued by a management company or tour operator in their name)for which tax is paid at a rate of 28%, which is the fixed % for rental income. With a full tax return required for expenses, rather than an automatic deduction as applies in Category B.
IVA / VAT is payable at a rate of 6% following an annual rental income in excess of €10,000. At which point quarterly IVA/VAT returns will be required for the subsequent tax year.
Social security / National Insurance: If you are already contributing in another country, or receiving benefits such as a pension, owners are eligible for a full exemption as will be the case in almost all non resident owners.
Otherwise, the social security payments under Category B will be made after the threshold of €16,768.80 Gross income is exceeded. The rate is 29.6% for self-employment income declared in the previous year.
If you'd like more information about our property management division here in the Algarve please feel free to drop us a line with any questions you might have.