To sound more natural (especially in speech), I would suggest: I live in a small town called Portree. OR I live in the small town of Portree. As the AI text pasted by Ahmadi noted, the second construction would be more natural if the listener already knows of the existence of the town.

The choice between "a" and "the" in this sentence depends on the context and the intended meaning: "I live in a small town, Portree." In this case, using "a" suggests that you live in any small town, and the specific small town you live in is Portree. It implies that Portree is just one example of a small town. "I live in the small town, Portree." Using "the" implies that there is a specific small town called Portree, and you live in that particular town. It suggests that the listener or reader is likely familiar with or aware of the existence of Portree. So, both options could be correct depending on the context and what you want to convey. If Portree is a specific town that the listener or reader is expected to know, "the" might be more appropriate. If Portree is just one example of a small town among many, "a" could be more suitable.