The Blevins Franks Guide To TAXES IN ITALY

The Blevins Franks Guide To TAXES IN ITALY www.blevinsfranks.com Contents Introduction Have you actually left the UK? The 91 day rule... Are you paying tax in the right place? What about the UK/Italy Tax Treaty? Are your investments tax efficient for you? What about your pension income? What about offshore bank interest? What about your rental income? What if you rent out Italian property? Will you have to pay inheritance tax in Italy? Who is going to inherit your assets? What about your Will? Summary Rates of Tax Income Tax Scale Rates for 2009 Inheritance and Gift Tax Rates for 2009 3 4 5 6 6 7 8 8 9 9 10 10 11 12 13 13 Introduction Moving abroad is something that many Britons yearn to do, and Italy is a very popular destination for many of them. Yet how much do you know about the tax implications of moving to Italy? This guide looks at many of the issues facing people moving from the UK to Italy, to raise awareness of issues that may affect you. Depending on your circumstances, however, there are likely to be things that you can do to minimise the problems, and you may even find that you can reduce your tax liability by moving to Italy! The Blevins Franks Guide to Taxes in ITALY| September 2009 You should always take advice when looking to purchase property in and/or moving to any country, and in particular Italy, where many of the taxes sound the same, but are calculated completely differently to similar taxes in the UK. There are even taxes which do not exist in the UK, e.g. notional income tax on deemed income and succession tax between spouses. Even the healthcare position is different in Italy, compared to the UK. An adviser with a good understanding of both jurisdictions can help you understand the tax implications of your move and work out how to make your money work for you, protecting it against foreign taxes, and how to make the most of the opportunities available. 3 Have you actually left the UK? One of the biggest problems people can have when they decide to move abroad is that although they think they have left the UK, they will actually remain UK resident under the UK domestic tax rules. There is no statutory definition of ‘residence’ in the UK, and the rules have been developed over many years and court cases. Residence is a matter of physical presence in a country, either in terms of time spent there, or the quality of the time spent there, and the quality of your connections with that country, in some cases. The UK has time-based residence rules: if you spend more than 183 days in the UK during a UK tax year, which is a statutory test, or more than 91 days per UK tax year (averaged over four UK tax years) in the UK, you are UK resident. The Blevins Franks Guide to Taxes in ITALY | September 2009 4 The 91 day rule can be misleading and is misunderstood by nearly everybody First of all this ‘rule’ is NOT law and is completely ignored by the UK Courts. The Courts only deal with law and the 91 day calculation, or rule as it’s often referred to, appears in a Revenue publication which HMRC preface by saying that it does not represent the law and is for general guidance only and so cannot be relied upon. Secondly, even if you spend far less than 91 days in the UK each year, you still may not have ‘left’ the UK. You first have to leave the UK permanently for a settled purpose. UK case law is littered with stories of people who claimed to have left the UK, and spent less than 91 days there, but were found by UK Courts to have remained UK tax resident because of the pattern of their lives, and the quality of their connections with the UK. Examples of individuals who were in the UK for less than 91 days, yet were found to have remained UK resident, include Mr Shepherd, the airline pilot who unsuccessfully claimed he was resident in Cyprus; Robert Gaines-Cooper who claimed to be resident in the Seychelles; and Mr Grace, another airline pilot, claiming to be resident in South Africa. The quality of your connections with the UK still count – an individual whose family all live in the UK but who works abroad and commutes back to the UK on some weekends could still well be UK resident. The same could apply if you retain accommodation for your use in the UK, where your family are based, and your business and social connections are. So day counting in itself is not always an accurate guide as to where you are resident. What will your position be if you retain a property in the UK? Could it be argued that your property overseas is much more of a holiday home rather than a permanent home base? Even where you satisfy the domestic residence criteria of Italy, as well as the UK domestic rules, under the terms of the UK/Italy Double Tax Treaty you can only be resident in either country at any one time, and so the Treaty has ‘tie-breaker’ rules to establish where you are resident. It might be dangerous to rely on the tie-breaker rules, as circumstances can change, often from year to year – sometimes all it could take is a bout of serious illness and your residence position could change, and you haven’t taken advice or prepared for it. Also, your interpretation of the rules might not be the same as those of the tax authorities in the country in which you are claiming not to be resident. The Blevins Franks Guide to Taxes in ITALY| September 2009 5 Are you paying tax in the right place? The opposite can also be true: many people move abroad and continue to wrongly pay tax in the UK, when they should be paying tax in their new country of residence. This can happen particularly where some people just never declare themselves to the Italian tax authorities at all, assuming that they should continue paying tax in the UK, particularly if they only have UK-source income such as UK pensions and savings income. It can be all very confusing unless you receive specialist advice. People who do this may end up paying more tax than they should, and had they taken advice before they left the UK, could have put into place tax-efficient structures for their money, saving them taxes and increasing their available income. If you are traced by the authorities in Italy and have not submitted appropriate Italian tax returns, or have under-declared your income because you are paying tax in the UK and believe that you don’t need to declare the income in Italy, this will be treated very seriously by the Italian tax inspector. It is treated as tax evasion, however innocently arrived at, giving rise to penalties and interest on any underpaid tax. Declaring that you have paid tax in the UK on income which is actually taxable in Italy will not be considered a defence under Italian law. The Blevins Franks Guide to Taxes in ITALY | September 2009 What about the UK/ltaly Tax Treaty? Doesn’t that stop you paying too much tax? Whilst the treaty between the UK and Italy means that the same income or gain is not taxed twice, not all income or gains are taxed in both countries. The problem is, if you don’t know the rules, you can end up paying more tax than you need to do if you are paying it in the wrong country. Also, where income or gains are taxed in both countries, although you can offset the tax paid in, say, the UK against the tax due in Italy, if the tax payable in the UK is higher you will not get a refund of the difference in Italy. So ideally, if you can avoid paying the higher UK rate altogether, you can reduce your tax bill this way. However, just not paying the UK tax is not an option, so you need to take advice to make all of your income as tax efficient as possible. 6 Are your investments tax efficient for you? For UK residents, income derived from ISAs, PEPs and Premium Bond winnings are all completely free of tax. However, these are only tax efficient investments for UK purposes, and all are subject to tax in Italy. Also, did you know that although anyone may hold Premium Bonds, regardless of where they are resident (under the terms and conditions as at 1st February 2009), only UK residents may contribute to an ISA? Those who have left the UK may continue to hold such funds, but they can no longer put further funds into such investments once they have left the UK. Keeping cash offshore is dealt with on page 8, but what about other investments, like shares, OEICs, unit trusts or investment bonds? The gross dividend income from UK shares (i.e. the dividend received, plus the 10% tax credit treated as being attached to the dividend) is taxable in Italy, as in the UK. You also have to consider Italian capital gains tax on disposal of these assets. Investment bonds are a vehicle that people often use, giving the freedom of deferring tax on any income or gains arising until money is withdrawn from it. If you are a UK resident this is usually for at least 20 years, and sometimes more, as you can take 5% (the 5% allowance) of your original investment each year tax-free in the UK, whilst the income and gains within the bond roll up tax efficiently. The 5% limit is cumulative, so if not utilised in one year, can be carried forward. The 5% allowance does not extend to Italian residents. There are very tax-efficient investment vehicles available to residents of Italy that can reduce taxable income, and thus income tax. They can also fall outside of Italian succession tax and law. If only ISAs were as beneficial for UK residents! The Blevins Franks Guide to Taxes in ITALY| September 2009 7 What about your pension income? The UK HMRC will not allow your UK pension to be paid free from UK tax unless you can prove it is taxed in Italy and may require evidence that you spend more than 6 months a year in Italy. It is possible to overcome this problem, and appropriate advice should be sought. What about offshore bank interest? Countries within the EU exchange information about ownership of bank accounts automatically, under the terms of the EU Savings Tax Directive. Under the Directive, there are two options available to those who have accounts in the many non-EU signatories to the Directive, e.g. Switzerland, the Isle of Man, Channel Islands etc. Under the first option, you can choose not to have details of the account(s) exchanged with Italy, in which case tax will be deducted at source, currently at 20% and increasing to 35% of the income from 1st July 2011. However, the income must still be declared in Italy, and failure to declare the income to the Italian tax authorities will be seen as tax evasion in Italy. Alternatively, you can opt for exchange of information regarding the account with Italy, in which case you will receive the income gross. Again, any failure to declare the income in Italy will be seen as tax evasion and can be penalised. The Blevins Franks Guide to Taxes in ITALY | September 2009 8 What about your rental income? Many people retain UK property to ‘let’ out when they leave the UK. For some, this is their ‘pension’ fund and they may have one or more buy-to-let properties; others are unable to sell their UK main home when they leave the UK, and so decide to let it out to provide an income. This income remains taxable in the UK, and must be reported there each year. The income is also taxable in Italy, and is added to your other income and taxed at the scale rates of tax, although the UK tax paid on this income can be offset against the Italian tax on the same income. You could also be liable to UK capital gains tax when you sell a UK property unless you remain non UK resident for 5 complete and consecutive UK tax years. Gains arising on UK properties are tax-free in Italy if the property has been held for more than 5 years. If the property has been held for less than 5 years, the gain is taxed as income. There are alternative methods of investment available to residents of Italy that are much more tax-efficient, and even where a property is not selling or being sold, it is worth taking advice to see if there is anything that can be done to mitigate taxes. What if you rent out Italian property? Many people who have bought a property in Italy look to rent it out, even if it is a holiday home. The money brought in from such activities pays for the mortgage, or annual local taxes and some of the upkeep. This money, even if it is just to ‘cover the bills’ whilst someone is using the property, is income derived from the property, and therefore subject to tax in Italy regardless of your residence position. A flat 15% deduction is allowed in lieu of actual expenses, and the resulting 85% net figure taxed is taxed at the progressive scale rates. If you have an Italian property that is not your main home and you are not renting it out, the Italian deem a notional income to arise, based on the registered value of the property. This income, even though it is not actual income, is taxable in Italy. The Blevins Franks Guide to Taxes in ITALY| September 2009 9 Will you have to pay inheritance tax in Italy? This tax was previously abolished but has now been reinstated for inheritances and lifetime gifts. Italian gift/succession tax applies to all Italian residents, and Italian assets of nonresidents. It is the beneficiary who pays the tax and the amount of tax payable depends on the value of the assets and the relationship between the deceased or donor and the beneficiary. Transfers between spouses are not exempt in Italy, although such transfers generally are exempt in the UK, and this means that there may be tax in Italy on the first death, but not in the UK. There is a UK/Italian Double Tax Treaty which only applies specifically to taxes arising on death. This means that where tax is imposed in both countries on the same assets on the same event, double tax relief will be applied. Children and spouses are each entitled to an allowance of €1,000,000. Other close relatives are entitled to lower allowances, and more distant relatives or those unrelated by blood or marriage, such as step-children or unmarried partners, are not entitled to any allowance. These allowances are lifetime amounts, and a running total must be kept if an individual receives more than one gift, or a gift as well as an inheritance from one donor. The rates of tax range from 4% for spouses and children to 8% for unrelated individuals. The Blevins Franks Guide to Taxes in ITALY | September 2009 Who is going to inherit your assets? Whilst Italian succession laws exist to protect the inheritance rights of children and spouses, they only apply to Italian citizens. If this is an issue for you, there are ways of avoiding the problem if you take specialist advice. 10 What about your Will? As forced heirship does not apply if you are not an Italian citizen, having a Will allows for assets to pass as you choose. Italy has signed the Hague Convention on Wills, but has not ratified it, and it has therefore not taken effect in Italy. There is no guarantee therefore that a UK Will will be valid in Italy. In addition, a Will in English would also lead to time and expense in translation and certification costs. If you are to be resident in Italy and retain UK assets, you should ensure that you have a Will in each country, cross-referenced to each other to prevent time-consuming expense and confusion on death. If you are not resident in Italy, you should consider preparing an Italian Will to cover your Italian property, ensuring that this cross-refers to any Wills in any other countries for the same reason. The Blevins Franks Guide to Taxes in ITALY| September 2009 11 Summary There are many issues facing UK nationals looking to buy property in and move to Italy, and a lot of these can be dealt with very easily, in many cases, provided you take advice. However, to make the most out of such a purchase or move, the adviser needs to be cognizant of both Italian and UK tax law, as something that can save you tax in the UK can have the opposite effect in Italy and vice versa. There is no one solution for everyone, because each situation is different, and it is important to do your research, but there is no substitute for advice tailored to your specific circumstances. The Blevins Franks Guide to Taxes in ITALY | September 2009 12 Rates of Tax Income Tax Scale Rates for 2009 Tax Bracket € Up to 15,000 15,001 - 28,000 28,001 - 55,000 55,001 – 75,000 Over 75,000 Tax Rate 23% 27% 38% 41% 43% Additional regional (ranging from 0.9% to 1.4%, depending on the region) and municipal (up to 0.8%) taxes apply on taxable income as calculated for income tax purposes. Inheritance and Gift Tax Rates for 2009 Spouses & Children Brothers & Sisters Other Relatives Unrelated Individuals 4% 6% 6% 8% The Blevins Franks Guide to Taxes in ITALY| September 2009 Furthermore, when real estate passes by way of an inheritance or gift, Cadastral Tax (1%) and Mortgage Tax (2%) will also be due, although if the property qualifies as the beneficiary’s primary residence, these two additional taxes are fixed at a flat amount of €168. 13 w w w. b l e v i n s f r a n k s . c o m Tax Planning Investment Management Asset Protection Trustees Retirement Planning Pensions QROPS Foreign Exchange Domicile Determination UK Tax Residents Living Abroad Tax Residency Expatriates Returning To The UK Blevins Franks Financial Management Limited is authorised and regulated by the UK Financial Services Authority only for the conduct of investment and pension business. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts and companies. Blevins Franks Tax Advisory Service only gives taxation advice; all of the advisers are fully qualified tax advisers. This guide has been prepared based on the laws of the UK and Italy as at 1 August 2009. It is a general guide only and, in explaining complex matters in a simple way, cannot be relied upon as a substitute for professional advice. Blevins Franks cannot accept any responsibility for loss occasioned by any person’s action (or refraining from action) as a result of reading this guide. You must take detailed professional advice relevant to your particular circumstances before any action is taken. w w w . b l e v i n s f r a n k s . c o m contact us for more information and personal advice on your situation Blevins Franks, Barbican House, 26-34 Old Street, London EC1V 9QQ 0044 (0)20 7336 1116 or CLICK HERE to send us an email alternatively CLICK HERE to fill out our enquiry form