The tax efficiency of a Life Assurance Investment Bond in Italy

Following on from a previous post about the tax efficiency of Life Assurance Investment Bonds in Italy, I thought that I would provide an example of the potential tax savings.  This is quite a mathematical blog post but one which I hope you will be able to follow:

For ease of understanding I will do a comparison:

Let's assume you have a diversified portfolio of assets to the value of €100,000 (either in Italy or in another country)




1.  If you were invested directly, i.e through an investment platform, then you would be subject to 26% Capital Gains tax (in Italy from 2014) on any holdings which were  bought and sold in any one tax year.  Similarly any income would be subject to the relevant income tax rate depending on the type of income.  e.g 26% on share dividends (for qualified participations ...this covers most people so I won't go into details).

Therefore if your fund rises from €100K to €110K and you liquidate the €10,000 then you would be subject to capital gains tax of 26% of the gain made.  i.e 26% of €10,000 = €2600 Tax to pay

2.  If you had invested the same portfolio in a Life Assurance Investment Bond then the tax bill would be considerably less:

If the portfolio rose by €10,000 in year one, then this would constitute a 10% gain on the portfolio.  In theory (and I know this is not exact but works for the purpose of this example), the portfolio will now consist of 10% gain (€10000) and the remainder (€100,000) is the original capital and will constitute the other 90% of the funds in the WHOLE portfolio (i.e 1/10 gain and 9/10th's original capital)

If you withdraw €10,000 from the portfolio at the end of the first year, then this it is assumed to have been withdrawn in the same proportions as the WHOLE portfolio at time of withdrawal.  i.e 1/10th Gain and 9/10th's original capital.

Therefore, €10,000 (the withdrawal), is split 1/10th (€1000) Capital Gain and 9/10th's (€9000) Original capital.

Since the law states that these types of arrangements are taxed at 26% capital gains tax then

the tax liability is 26% of €1000 (the capital gain element of the withdrawal), = €260.

So, in this example there would be a tax saving of €1800 in year one.  If you have larger portfolios then proportionately the savings will be higher as well.

The above example aims to provide a simplified example of how you might save tax by investing in this type of arrangement.  It does not take into account an individuals specific circumstances or possible changes in tax legislation which may take place after the time of writing.

However, if you have a portfolio in Italy or in another country and you are a tax resident of Italy, then this might just be the way to save yourself a considerable amount of tax at a time when taxes are being increased in every other way.