It's time to save some tax in Italy!

With all the talk of the last 6 months about which extra taxes we need to pay in Italy and the different assets that are now taxed, both home and abroad, I thought it was about time that we started to fight back.  

My impetus to do this was prompted by another calI from someone who asked whether they were planning their tax status correctly in Italy.

In most cases the answer to this question is NO.  And on further investigation it almost always transpires that money is being held overseas in tax free bank accounts or investment plans that have no tax free status in Italy.  An example would be the ISA in the UK.

Inevitably the question arises:  What tax free/efficient investing/saving  alternatives are there in Italy?

The very simple answer is the Polizza Assicurativa, or the Life Assurance Bond..

They are ideal for people who want to build capital and take income from capital.  The tax advantage is that the capital is not taxed at source, so you avoid any capital gains tax until the point at which you make withdrawals

Let’s use an example: A married couple living in Italy.

The husband receives a pension of €12,000 per annum and his wife receives a pension of €10,110 per annum. They have an income requirement of €30,000 per annum, therefore their income needs are €8000 short

They have a portfolio of €200,000 and are taking a 4% withdrawal from it this year(i.e. €8000 pa). This would result in an Italian income tax bill of €2080 pa (€8000 x 26% income tax) and an annula charge of €400 (IVAFE 0.2% p.a on the value of the portfolio) each year.

NET income (after tax): €5520  (This couple are still €2480 short of their required income)

If they were to house their portfolio within a Polizza Assicurativa / Assurance Bond, their tax bill, if the portfolio value at the time of withdrawal was €208,000 could potentially be deferred as follows:

The Bond value is now €208,000 and a withdrawal of €8000 represents approx 4% of theTOTAL fund value (€208,000) at withdrawal.  Therefore, it is assumed that when the withdrawal is taken it is a return of capital and a return of capital GAIN in the same proportions as the total Bond at the time of withdrawal (i.e 96% of the amount is returned to the owners as original capital invested , €6400 and the remaining 4% is a return of the capital gain made on the total portfolio, €1600).  

Since there is no original capital tax, then capital gains tax is applied to the gain part €1600 x 26% = €416.  

The IVAFE tax is also charged, but annually and not on each transaction. 

In this example this couple would have a NET tax position of €7584 

A tax saving of €2064 during this year.

A significant difference to holding the assets the way they are currently.

Of course, every case will be different and factors such as investment return and eligibility to age related tax allowances will affect the results. Nevertheless, you will always avoid tax if you shelter your capital.

Even if you do need to draw an income from your capital, it is always more tax efficient from a Bond, than say, drawing the interest from a bank deposit or leaving the money in an ISA in the UK.   This is because every time you take a withdrawal from an Investment Bond, it is considered that part of what you are withdrawing is a withdrawal of capital and so it is not taxable. For example, if you had the investment for 10 years and it had doubled in value only about half of the amount that you withdraw would be taxable. This is a very simple way of explaining the taxable liability but in reality, the actual calculation is a little more complicated!

Nevertheless, it demonstrates that an Assurance Bond investment is more tax-efficient for you, as an Italian resident, than bank deposits and other types of investments or directly held portfolios.  (for example, ISAs and income from directly held funds/unit trusts etc ).

If you would like more information about investing on a tax-efficient basis in Italy, or any other aspect of retirement and inheritance planning, you can contact me for more information either by e-mail at gareth.horsfall@spectrum-ifa.com or by telephone on 333 6492356