Are investment trusts a smart way for UK expats in Portugal to build income, or an extra layer of complication you could do without? It is a question I hear regularly, usually from retirees who have held trusts such as global growth or equity income names for years and now wonder what moving to the Algarve has done to them.
In this guide I explain what investment trusts for UK expats in Portugal actually are, how they differ from funds and ETFs, how Portugal is likely to treat them for tax, and the practical points that trip people up. It is general information rather than personal advice, but it should help you ask better questions.
What Is an Investment Trust?
An investment trust is a company listed on the London Stock Exchange whose only business is investing in other assets, such as shares, property or infrastructure. You buy shares in the trust through a broker, just as you would buy shares in any listed company. The share price is set by the market, so it can be above or below the underlying value of the assets (the net asset value, or NAV).
When the price is below NAV the trust trades at a “discount”; above NAV it trades at a “premium”. This is the biggest practical difference from an open-ended fund, where you always buy and sell at the NAV.
Trusts are “closed-ended”, meaning the number of shares is fixed unless the board decides to issue or buy back shares. Managers therefore never have to sell good investments to meet redemptions, which is one reason trusts have historically suited illiquid assets such as property and infrastructure.
How Investment Trusts Differ from Funds and ETFs
Many expats own funds or exchange-traded funds (ETFs, which are baskets of investments you buy like a share). Trusts sit alongside these but behave differently in a few ways.
- Gearing: trusts can borrow to invest, which can magnify gains and losses.
- Discounts and premiums: the price you pay can differ from the underlying value, in both directions.
- Dividend smoothing: trusts can hold back some income in good years to support payouts in lean ones. Some have raised dividends for decades, but this is never guaranteed.
- Charges: ongoing charges vary widely. Always check the ongoing charges figure and any performance fee before you buy.
Why UK Expats in Portugal Look at Investment Trusts
The appeal is usually income and familiarity. Many British retirees have held trusts inside UK accounts for years and like the long track records. Others value access to assets that are hard to buy directly, such as renewable energy infrastructure or private companies.
In my experience working with clients in the Algarve, the real attraction is that a well-chosen trust can provide a steady, understandable income stream. The catch is that where and how you hold it matters a great deal once you are Portuguese tax resident.
Portuguese Tax and Investment Trusts: The Key Points
Once you are tax resident in Portugal, you are generally taxed there on worldwide income and gains. Investment trust shares are normally treated like other listed shares, so dividends and gains are usually reported on your Portuguese tax return (the IRS return).
For most investment income and capital gains, Portugal has historically applied an autonomous flat rate of 28%, with the option to include the income in your general bracketed income if that works out cheaper. Rates and rules change, so please confirm the current position with a qualified Portuguese tax adviser before acting.
Two points deserve special attention. First, ETFs and funds are classified differently from shares in Portuguese law, and the treatment of non-Portuguese structures can be less straightforward. Trusts, as listed companies, tend to be simpler to classify, but you should still confirm with your tax adviser.
Second, the UK-Portugal double taxation agreement exists to stop the same income being taxed twice. The UK does not generally withhold tax on dividends paid by UK companies, so the main tax bill on UK trust dividends is normally Portuguese. For more on how the treaty works, see the UK government’s guidance on tax treaties.
Holding Trusts in an ISA While Living in Portugal
This is where many people get caught out. A UK ISA shelters investments from UK tax, but Portugal does not recognise ISAs as tax-free. Dividends and gains inside an ISA are generally reportable and taxable in Portugal if you are resident there.
You also cannot usually pay into an ISA once you have left the UK, although existing ISAs can normally be kept. If you hold trusts inside an ISA, you should still report the income to Portugal and keep records of your purchase prices and sale proceeds.
Practical Points Before You Buy
Can you still buy trusts as a Portuguese resident? That depends on your broker. Some UK platforms restrict or close accounts for overseas residents, so check your platform’s current policy before building a portfolio around it.
Currency is another factor. Trusts trade in sterling, but you live in euros. A fall in the pound lowers the euro value of your income even if the trust performs well.
Finally, think about concentration. A portfolio made up entirely of high-yielding trusts can leave you exposed to a single theme, such as UK property or renewables. Diversification across managers, regions and asset types is usually wiser than chasing the highest yield.
Risks to Weigh
Trusts are not a free lunch. Discounts can widen in market stress, gearing can hurt in falling markets, and dividends can be cut. A high yield is often a sign that the market is worried about something, so look at whether the income is covered by the trust’s earnings or being paid partly from capital.
Charges matter too. Over twenty years, an extra 0.5% a year is a meaningful drag on your pot. For a broader look at fees, see our article on the hidden costs eating into your pension.
Choosing a Trust: A Simple Checklist
Before buying any trust, I suggest working through a short set of questions. They will not guarantee a good outcome, but they filter out many of the common mistakes.
- What does it invest in? Make sure you understand the underlying assets and why you want that exposure.
- How big is the discount or premium? Compare it with the trust’s own history, not just with other trusts.
- How much gearing does it use? Higher borrowing means a bumpier ride.
- Is the dividend covered? Check whether income comes from earnings or is partly paid out of capital.
- What are the total charges? Include management fees, any performance fee and your platform’s dealing costs.
- Can you hold it from Portugal? Confirm your broker will let you buy and sell as a resident.
Keeping Records for Your Portuguese Tax Return
Good records make your annual Portuguese return far less stressful. For each trust, keep the purchase date, number of shares, purchase price in sterling and the exchange rate on the day. Do the same when you sell, and keep every dividend statement.
Gains and dividends are generally converted to euros for reporting, so a spreadsheet or your platform’s annual tax summary can save hours. Many expats also find that a local accountant familiar with foreign income pays for itself, particularly in the first year or two of residency.
It is also worth reviewing your holdings once a year. Retirement is not static: your income needs, tolerance for risk and the tax rules can all shift, and a trust that suited you five years ago may no longer fit your plan. A short annual review is usually enough to catch problems early.
Frequently Asked Questions
Are investment trusts a good choice for UK expats in Portugal?
They can be, particularly for long-term income and diversification, but they are not right for everyone. Suitability depends on your wider portfolio, risk tolerance, platform access and Portuguese tax position.
How are investment trust dividends taxed in Portugal?
If you are Portuguese tax resident, dividends are generally taxable in Portugal, historically at a flat 28% rate with an option to aggregate with other income. Always confirm current rates with a Portuguese tax professional.
Is an ISA tax-free in Portugal?
No. Portugal does not recognise the ISA wrapper, so income and gains inside an ISA are generally taxable in Portugal for residents.
What is the difference between an investment trust and an ETF?
A trust is a listed company with a fixed number of shares that can trade at a discount or premium to NAV, and can borrow. An ETF is typically open-ended and designed to track an index closely.
What to Do Next
Investment trusts can play a useful role in an expat portfolio, but the tax treatment, platform access and currency risk all need thinking through before you buy. Start by listing what you already hold, where it is held, and how it is being reported in Portugal.
If you’d like to discuss how this affects your personal situation, get in touch with our team. We specialise in helping UK expats in Portugal make the most of their pensions and investments. You can also explore more guides on our homepage. For independent, free guidance on investing basics, see MoneyHelper.
This article is general information, not personal advice. Tax rules change and depend on your circumstances. Investments can fall as well as rise, and you may get back less than you invest.
Matthew Renier is a Chartered Financial Adviser at Arthur Browns Wealth Management, based in the Algarve, Portugal, helping British expats manage their pensions and financial planning across borders.
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