The Common Reporting Standard

 

I want to go over some old ground, which will show why getting your declaration right in Italy is becoming more and more important.  I remember well, during the spring back in 2014/15 when I was contacted by a large number of people who had recently been contacted by the Agenzia delle Entrate (AdE) for unreported assets in their Italian tax return, or in a high number of cases, failure to even submit an Italian tax return for income/assets that they held overseas.    This is now happening again but with more rigour!   This is all coming about because of The Common Reporting Standard and Automatic Exchange of Information (AEOI).   These are international agreements that were developed by the 34 member states of the Organization for Economic Cooperation and Development (of which Italy was one) via its permanent “Global Tax Forum”. AEOI was designed to help combat cross-border tax evasion by individuals who were not reporting and paying applicable taxes on assets held through non-domestic financial institutions, whether these assets are held in the name of the individual or through certain offshore entities such as companies, trusts, foundations, partnerships and similar. It is primarily focused on individuals and “passive” income (i.e. dividends, interest, capital gains, etc.). It came into force in 2017 but information was backdated to the 1st January 2016.    How does Italy know if I have assets abroad? Have you been contacted in the last few years to provide your TIN. (Tax Identification Number) to your overseas bank and/or financial institution? I have, on numerous occasions! If you a resident in Italy this number is your codice fiscale in the UK it would be your National Insurance number and in the US, your social security number, to name a few.  It is now a legal requirement to provide your TIN number on any financial contracts that you adhere to, be it banks accounts, investment portfolios, insurance policies, or other financial instruments. I have a small investment account with Hargreaves Lansdown in the UK and was recently contacted by them to update my codice fiscale. Through an error in their systems they had failed to pick up on the fact that I had given it some years ago, but they were refusing to allow me access to my account if I did not provide it again. It got resolved, but it shows you how seriously this is now being taken when financial institutions will block access to your accounts if you don't provide them with the information needed to share information with the correct tax authorities.    What information will they share about me?  Under the Common Reporting Standard the financial information reported includes the name, address and tax identification number (where applicable) of the asset owner; the balance/value, interest and dividend payments and gross proceeds from the sale of financial assets. The financial institutions that need to report include banks, custodians, financial institutions, investment entities such as investment funds, certain insurance companies, trusts and foundations. The tax authority will receive much more information than ever before and even simple bank account balances showing money coming in and out can raise red flags and the AdE can choose to investigate where the source of the money came from.  Is this new?  Exchange of financial information across Europe has been going on for a long time now and can be traced back to the introduction of the European Savings Tax Directive 2005. The Common Reporting Standard is an enhancement of this. I remember that in 2012 when I was contacted by a number of UK rental property owners who had been legitimately declaring their UK property income in the UK for tax purposes. However, as residents in Italy they had not declared anything because they didn't know they had to. A clear exchange of information took place and the Guardia di Finanza did a significant number of visits to these people to fine them.  ***This is also happening again this year! We are seeing the AdE issuing letters for unreported income going back as far as 2015/2016***    ***The Covid crisis has sharpened the eyes of the tax authorities as they are now searching desperately for more tax revenue lost through the pandemic. We have seen AdE activity rise since the start of the year and even seemingly small mistakes on tax returns or undeclared assets are being investigated***   Low hanging fruit! Remember that with the kind of information that the tax authorities are receiving from one another, we really are the lowest hanging fruit to pick from. Easy pickings! So, my advice is always the same. The past cannot be corrected but you can change your future. Hiding and hoping the problem will go away is not an option. The only solution is to get your financial situation 'in regola'.    What will I pay? How you declare your money and how much you will pay to regularise your situation is a question that can only be answered by a commercialista, but it does make sense to have a look at your whole financial situation beforehand to see what damage limitation you can do by planning efficiently as a tax resident in Italy.    "Never look back unless you are planning to go that way" If you would like to talk to me about this blog or anything else then you can drop me a line on gareth.horsfall@spectrum-ifa.com or call me on 3336492356        SIGN UP TO MY EZINE.  If you received my Ezine from family members, friends, or it was forwarded to you then feel free to sign up yourself.  Just click HERE

Brexit - Important financial news - Part 2

 

Tax on UK domiciled assets  This is probably the most revealing piece of information that we have discovered, and whilst it is new for UK residents, it has always been the tax case for other non-EU Italian residents e.g. US citizens. And very important information it is as well for the holders of UK domiciled non-property assets (excluding bank accounts). We are not sure if most commercialisti are aware of what we discovered and so we encourage you to have a discussion with yours if you think you might be affected!   Essentially, if you hold non-EU approved investment funds in a portfolio with a bank or an asset manager, then these same assets must meet 3 simple rules for the flat 26% tax treatment for investment income and capital gains to be applied, in Italy.  1. The fund or collective investment must be established in a member state of the EU or EEA 2. It must be sold in Italy under the relevant distributions guidelines from the regulator CONSOB 3. And if you are working with someone who manages your money they need to be subject to EU authorisations in the country in which they operate from And the important point to note is that any investment fund must be covered under all 3 criteria and not just one! What is the consequence if your collective investments don’t meet these criteria? Very simply all your investment income and capital gains are added up and taxed at your highest rate of income tax! They are added to all your other income for the year and taxed accordingly. For someone who is earning up to €15000pa (pensions, rental income and/or employment income) then this would be advantageous, but for any figure above then your tax rate will be higher than the 26% currently charged on the same asset. How can you check if you have a non-EU domiciled collective investment asset?   Very simply, all securities are allocated an International Securities Number (ISIN code). You will need to check that yours starts with an EU approved code, such as IE, LU, FR, IT etc. For any UK citizen living in Italy holding securities/funds or assets, whose code starts with the letters GB, then it might be time to take another look at your financial planning as a resident to try and mitigate any future tax charges on these assets.  And that's it for this blog! There are quite a few financial planning considerations to be taken into account here and so I will elaborate on them in future blogs, but if you have any doubts as to whether any of these topics may apply to you, or want some help looking into anything, then I would suggest you get in touch.    You can contact me in the usual ways on cell +39 333 649 2356 or on email gareth.horsfall@spectrum-ifa.com. SIGN UP TO MY EZINE.  If you received my Ezine from family members, friends, or it was forwarded to you then feel free to sign up yourself.  Just click HERE

Brexit - Important Financial News - Part 1

 

 

I normally like to start a new blog with a story or some kind of recent experience to try and provide context to what I am about to write. However, because of my lack of travels, I am lacking stories at the moment. In fact, I am now starting to believe that there is a government conspiracy to bore me to death, or they are in collaboration with Netflix to lobotomize me with endless series and films. Lockdown phase 2 is proving somewhat monotonous! 

So, with the fact that there isn't really much to tell you other than work related matters, then we might as well crack on, because the truth is that as a result of Brexit a number of financial things have changed. A lot of my clients are now non-EU citizens (i.e. Brits), and so a better understanding of Italian tax legislation is essential. We have done some extensive digging in this regard and our investigations have sprung up some unwelcome news for some. 

The information we found was buried so deep in Italian tax law text that it took us (in reality my colleague Andrew Lawford ended up discovering it through sheer determination and persistence) quite some time to dig it up. So make sure you read the whole E-zine as something might be relevant to you.

I should add that the financial services industry is still trying to work itself out and we should remember that there is no deal for financial services as part of the Brexit trade agreement. A lot of hope is being placed on a potential trade agreement being reached on financial services by the spring, as professed by Rishi Sunak, but I have my doubts.    

 

 

So, what are the concerns? 

Let's start with the one that got the most press leading up to Brexit. The automatic closure of UK bank accounts for EU residents. 

There is not much to say here, other than the main culprits seem to be Barclays, Lloyds, Nationwide, Royal Bank of Scotland and Halifax. To date, my experience with clients is that the closure letters are a bit of a scattergun approach. Not everyone I know with an account in these banks is being approached to close it. 

I am asked a lot about the possibility of using a UK address of a relative or friend and whether this would alert the bank to you living in the EU or not? The likelihood is that it will for 2 reasons. The first is that under the Common Reporting Standard (International sharing of tax and financial information) banks only need to 'suspect' that you are resident in another country. This might be determined from activity on your account, or other financial information that they may receive from foreign tax authorities. The second reason is that ultimately you should be asked to prove the address you provide. A simple check on the land registry can avert them to the fact that you are not the registered owner of the property. A standard requirement is to request a copy of a utility bill showing your name and address on it or some kind of official tax authority document. If you are unable to prove these, then the chances are that the banks will catch up with you sooner or later.

So, what are the alternatives? I have recommended Fineco as a good Italian bank alternative (for transparency purposes, I have been an account holder for approx 10 years) but I believe that more of you than ever are finding it easy to open and use Transferwise as a transitionary online solution. But it's NOT a bank, so beware! There are online banks as well, such as N26 and the online offshoots of the regular Italian banks. There are certainly lots of options available although finding a non-UK alternative that will allow UK direct debit payments is pretty much impossible.

UK property ownership 

I have written previously about this and the increased wealth tax that will now be charged on UK property ownership for Italian residents. 

To recap, in a pre-Brexit world a UK property owned by an Italian resident would have had a wealth tax charged against it each year, in Italy. The value for calculating this charge was 0.76% of the council tax value of the property. This is considerably lower than the market value in most cases. However, now that the UK has left the EU the method for calculating that wealth tax changes. 

Properties that are located outside the EU are subject to the same charge, 0.76%, but in this case the valuation basis moves to the purchase/acquisition value of the property, where provable, and the market value otherwise. For most people I am finding that this is quite a difference, and for anyone who has bought in the last 10 years or so, this means a mostly, higher annual wealth tax charge. To date, I have only come across one person who retired to Italy and had retained the family property in the UK for many years, and could benefit from a very low purchase value for calculation purposes, hence a net tax benefit as a result of the tax change post Brexit. Most are going to find that their cost of holding UK property will increase as a result of the UK leaving the EU.

 

Tax break 

For anyone inclined to sell their UK property then we shouldn't forget that there is the possible 'sale-of-home' tax break as an Italian resident. If you have owned the home for more than 5 full tax years then Italy does not consider a property sale speculative (even a property located overseas) and so no capital gains tax is charged in Italy. You may have tax applied in the country in which the property is situated, in which case you would need to check the local tax laws. In the case of the UK, a property sale as a non-UK tax resident means capital gains tax would be charged on the property, but only from the date at which the legislation was introduced: 6th April 2015. What this means is that any gains made up to that point can effectively be written off, and the cost value for the purposes of calculating the capital gain would be the value as at the 6th April 2015 or later, depending on when you bought the property. A handy tax break for anyone who has held property in the UK for more than 5 years. 

 

 

UK IFAs

Now, we come onto the more technical points and an area which I see evolving over the coming year/years: UK IFAs (Independent Financial Advisers). 

Even when the UK was inside the EU it was not uncommon for me to come across people who had existing relationships with UK based IFAs who advised them on their finances, in the same way that I do for my clients living in Italy. But, even inside the EU most firms were not licensed to work with clients who were living in an EU state (it was easy enough to check on the Financial Conduct Authority website in the UK), and even in the few limited cases where they had the licence they did not have any experience of the Italian tax and financial system, so their advice was mainly useless and normally bad for the client. However, many continued to operate regardless, protected (loosely) by being a member of the EU. 

Fast forward to a post Brexit world and the fog has cleared. If you are working with a UK based IFA, and living in Italy, then you should not be receiving any advice from them. They will not have the necessary authorities or licences to operate in the EU, and as such, you as a client are not protected for any advice that they give you. This has been very clearly highlighted in a Banca D'Italia document which was released at the end of last year. 

If you do work with any UK based financial professional it would be in your interests to contact them and ask if they have an EU based entity to ensure they can continue to work with you. In much the same way as the banks are pulling out of the EU (the ones that have no intention to develop or maintain their existing EU business), IFA firms (small or large) should also be doing the same.  

I have to admit, that I have benefited from this because a number of UK firms with Italian resident clients have already contacted me about passing on their clients because they are no longer able to work with them. I expect this to continue as more firms understand their legal liability of working with clients in an un-licensed capacity.  

If you are in this situation please speak with the firm and/or send me a message and I can help you to look into it in more detail. 

Asset managers

This is a category, very similar to UK based IFAs. These are firms which generally manage sizeable portfolios for clients and have a direct relationship with the end client. To date there are mixed messages coming out of this sector. Some asset managers are aiming to pass EU based clients to EU based firms, like ourselves, others are clinging onto various legal loop holes to retain business. If you have a portfolio managed by a UK based asset manager directly, then the best you can do is to contact them and ask them what their post Brexit plans are. We expect that over time the EU will develop a more protectionist and hardline stance on working with non EU based firms.T his will ensure that they can more readily protect their EU residents and citizens and also win business from the UK. 

Where UK asset managers are used inside Italian tax compliant accounts, in the way that we mostly structure assets for our clients, then you do not have to worry as the provider of the account will be keeping abreast of legislation as it changes. 

***For all my clients, please be aware that we are on top of any changes in this regard and you do NOT need to contact your asset manager as a result of the content in this blog. If anything changes we will notify you as soon as we become aware. We also have contingency plans in place should any changes need to be made*** 

You can contact me in the usual ways on cell +39 333 649 2356 or on email gareth.horsfall@spectrum-ifa.com.

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Pensions, bank accounts and more...

 

There is nothing like a cold snap to focus the mind and it certainly arrived with a bang this year. In Rome we lost about 20 degrees of temperature in a week. However, I have to confess that I am rather glad that the autumn months are now upon us because the prolonged hot temperatures play havoc with trying to be productive.    In this E-zine, as you will see, there are a number of shorter topics, but ones which I think are relevant for our lives in Italy. During the summer I have been scanning the financial papers and the 'norme e tributi' pages of Sole 24 Ore to see what might affect our lives in the future. Fortunately, the Italian government seemed to give us a break this year and I didn't find much of significant interest. However, a number of other matters have arisen in the last few weeks.   How should my pension be taxed in Italy?    Let's start with one of the more interesting matters that arose during the summer. I was contacted by a client who was enquiring about taking money out of her QROPS pension (a QROPS is a UK pension that has been moved away from the UK but still operates like a UK pension - useful when living abroad!).   I have always advised my clients that any withdrawals from a UK personal pension are taxed at income tax rates in Italy but over the last few years I have come across a number of clients whose commercialista has been declaring the pension as a 'previdenza complementare'. This is the Italian equivalent of a UK personal pension. The main reason for choosing this route seemed to be a preferential flat tax rate of 15%. My argument has always been that the two structures have fundamentally different characteristics and therefore a UK personal pension should be considered an irrevocable trust, hence withdrawals are subject to income tax. In fact as far back as June 2018 I wrote the following in an E-zine: I have heard stories from various people over the years that their commercialisti declare their UK pensions as ‘previdenza complementare‘, which loosely translated means complementary pension. However, the definition does not accurately complete the story. The reason for declaring it in this manner is that it is taxed at a preferential tax rate of 15%. I must admit here that I don’t think is the correct way of declaring income from an overseas pension / retirement plan. The ‘previdenza complementare‘ is a vehicle used in Italy to complement the pension which is offered through Italian social security (INPS). You may argue that this has the same purpose as that of an overseas pension fund. However, this is where the similarities end. In the case of a UK pension fund your contributions would attract tax relief during the accumulation phase. In the ‘previdenza complementare‘ (PC) the fund is taxable during the accumulation phase. The UK scheme is also not linked to the state scheme in any way and you can withdraw money from age 55 (personal pension) or scheme retirement age (occupational pension). The PC is linked to the Italian state retirement age. Lastly, since the contributions into a UK fund are paid gross into the plan, then the income is instead taxed on the way out, at the normal rates. The Italian PC has a preferential rate of taxation starting at 15% and reducing to 9% depending on how many years you have been contributing to the fund, because it is taxed during the accumulation phase.  In short there are some distinct differences which lead me to believe that declaring a pension fund / retirement fund (which is a trust) as a ‘previdenza complementare’ in Italy, is incorrect. If you are in doubt then speak with your commercialista. In a lot of cases I was informed that the commercialista had contacted the local Agenzia delle Entrate and they had confirmed that this is correct. So, who was I to challenge it? However, I still believed that it was incorrect. Of course, no-one challenged it because it also meant the difference between being paying a 15% flat tax rate on that income or progressive income tax rates starting from 23%.   However, during the summer the client I referred to above contacted her commercialista, who did not accept this definition, but in fact presented an 'interpello' issued by the Agenzia delle Entrate (an interpello is basically an 'opinion' from the Agenzia delle Entrate on a specific case that is presented to them) from May 2020 regarding a UK personal pension holder. In the interpello (which you can find HERE - the interesting part starts on page 7) it indicates that a UK personal pension should not be considered a 'previdenza complementare', but should actually be subject to progressive tax rates in Italy. This is quite an eye-opener because if this is the case, then it flies against the information gained from various commercialisti.   I should add here that the interpello is merely an indicative judgment in this particular case and is by no means a definitive decision for everyone holding a UK personal pension and resident in Italy. However, the fact that the AdE has gone to the trouble to write this gives us a pretty good idea into their thinking, should they choose to follow it up.   What to do?  So what should you do if your commercialista has advised you to declare your UK personal pension as a 'previdenza complementare' and you are now benefitting from the 15% flat tax rate? I would take the interpello to them and ask their opinion based on the new evidence. Or you may choose to do nothing. Whatever your choice or the advice from the commercialista, we are now a little more enlightened into the thoughts of the Agenzia delle Entrate on this topic.      Brexit  It is worth noting here that Brexit is almost upon us and whatever your opinion as to how the UK will exit, a messy unfriendly exit may bring a few matters to light. In particular, the interpello also states that pension funds which 'could' be deemed to qualify are those which conduct business cross border and meet the pension rules of both EU states in which they are operating. I don't know of a UK personal pension provider that does this anyway,  but the mere fact that the UK is in the EU may gloss over some of these finer points. But then, what will happen, once the UK leaves the EU?  Which leads nicely on to the next problem that Brits are now facing in Italy.   Bank account closures for UK citizens living in the EU   By now, I am sure you have read the headlines saying that a number of UK banks are contacting or have contacted their customers living in the EU to close down their UK banks accounts, potentially leaving them without a UK account. To date the main culprits are the Lloyds banking group, which includes Halifax and the Royal Bank of Scotland, Coutts and Barclays. I am afraid to say that the rumours are true and I know of a number of people who have been contacted already.  The culprit, of course, is Brexit.   These banks have now had to weigh up the benefits of retaining bank account holders in the EU post Brexit, because once they are banks out of the EU market place they will be forced to adhere to individual EU jurisdictional regulations, as well as UK regulations, if they want to continue to service clients in any EU state. Clearly, for a bank which has no intention of developing business in Italy (in our case), nor does it have a sufficiently large client base in Italy already, then they are going to need to look to close down activities in those jurisdictions to ensure they do not fall foul of the regulators.  It is interesting that, in contrast, HSBC Bank has not decided to pull from its EU markets because it has sufficient activities which take place throughout the EU. I have also heard that Nationwide is also not pulling any activities just yet.   For many clients this is going to be a very tough time, as you could lose a bank account in the UK when you may still have bills being paid, or you simply use it when you are in the UK. To make matters worse, because you are no longer a resident in the UK, you can no longer request an account from another UK banking group.   Many of the groups will also offer their international bank account services, of which the majority are based in the Isle of Man. This is also not a  good idea because the Isle of Man is not in the UK, but is a UK dependant territory and is deemed a fiscal paradise. It is currently on the grey list of 'could do better' in global fiscal transparency with the EU. It is anyone's guess what will happen after the UK leaves the EU, but it is certainly not beyond imagination that the EU will look to impose punitive tax measures for anyone holding accounts in UK offshore jurisdictions. Let's not forget that it only came off the black list in 2015!  So, without any other options perhaps one of the better solutions is to look at an Italian bank which can provide a GBP account. I have used Fineco for years, and recommend it to many clients. They offer a EUR current account linked to a GBP and USD account and transfers of cash between accounts are made at spot rate, with no fee. It might be a solution, but will be no consolation for losing your UK bank account. Once again, another downside of Brexit for those of us that have chosen to live in the EU.  Why you should never leave more than €100,000 (or currency equivalent) in your bank account   Still on the subject of banking, does the sound of a bad bank sound appealing to you? A bank that is so bad that it can take all the bad from all the other banks and just keep it there and away from us all. It sounds like a great idea in theory.  On the 25th September the EU had a consultation round table event with a number of European bank leaders, asset management groups and government officials to discuss the possibility of creating a European-wide 'bad bank' which would take all that bad debt (debt which cannot be paid back for one reason or another) and which is currently sat on the balance sheets of a lot of European banks, particularly Italian ones and other Southern European states. The idea being that this bad debt could be whisked away from the banks, freeing them up from the worry of having to manage this debt and giving them the liberty to start lending once again, supposedly to individuals and businesses which pose a better credit risk and would be more reliable at paying the debt back.  So far so good. I would not argue at this point. It seems like a good idea to help stimulate economies especially after the COVID-19 crisis.   But morally, should we accept this?    This is the argument put forward by a number of EU functionaries who argue that the banks are, once again, getting another bail out at the cost of the taxpayer. You and I.   To remedy this, the 'Bank recovery and resolution directive' (BRRD) has proposed that certain parties should also have to meet some of that cost as well as the EU/taxpayer itself. Those parties have been identified as the shareholders of the bank, holders of the banks bonds and lastly, the one that should interest us all: deposit holders with more than €100,000 or currency equivalent held in any banking group. Does this mean that the EU, to fund the COVID-19 crisis, could make a cash grab on deposit holders with more than €100,000 or currency equivalent, in their accounts? At this point it is only a proposal, but I shall be watching this space carefully.  Based on this news, there is probably no better time to look at your financial plans closely especially if you are holding high levels of cash in any banks around Europe.  NS&I slashes rates!    You might be someone who has been investing in NS&I products in the UK as a diversifier to your other holdings, or maybe just someone who likes to 'play it safe' with your money.   National Savings and Investments, NS&I, are backed by the UK government, and due to the COVID-19 crisis, the government has now moved to slash rates on all national savings products to the point where you have to ask yourself, 'are they worth it?.' The rate on on the Direct Saver account has been slashed from 1% interest per annum to just 0.15%.Income Bonds, which have for a long time been considered a best buy, have been slashed from 1% interest rate to just 0.01%pa.   Not only that, but the average interest rate on Premium Bonds (with the chance to win the big prize) will fall from 1.4% to just 1% and the amount of prizes issued will be reduced significantly.   If that is not enough, the Bank of England is also toying with the idea of introducing a negative base interest rate. If they apply that to the NS&I products, then you will be effectively paying the government to hold them.    Time to consider alternatives to protect your capital?  I hoped you have enjoyed this 'return to normality' E-zine. I will be sending out more information in the coming weeks and months to keep you up to speed with the goings on in the financial world and how that might impact our lives in Italy. If any information from this E-zine has interested you and you would like to get in contact, you can reach me on gareth.horsfall@spectrum-ifa.com or on cell phone 333 649 2356 by call, sms or whatsapp.    SIGN UP TO MY EZINE.  If you received my Ezine from family members, friends, or it was forwarded to you then feel free to sign up yourself.  Just click HERE

DISCLAIMER The views expressed here are my own. They are not necessarily shared by The Spectrum IFA group or any other company named or implied. They are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. Neither should this be considered tax advice. If in doubt we always recommend that you consult a suitably qualified tax consultant. References to specific securities or companies are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities FOR LEGAL INFORMATION ABOUT THE ITALIAN BRANCH OF THE SPECTRUM IFA GROUP CLICK HERE Copyright © *2018* *The Spectrum IFA Group*, All rights reserved. Want to change how you receive these emails? You can update your preferences or unsubscribe from this list.

The best tax day of the year 2020: July 5th

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Watch out for your uber-rich neighbours

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Sono un cittadino Italiano

 

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INTEREST RATES HAVE BEEN FALLING SINCE THE LATE 1970s.

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7% flat tax for people retiring to Italy...T&Cs apply

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Tax Reporting or Tax Planning?

REPORT /rɪˈpɔːt/ verb gerund or present participle: reporting give a spoken or written account of something that one has observed, heard, done, or investigated.   PLANNING /ˈplanɪŋ/ noun the process of making plans for something.

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It's a matter of fact...not choice

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The No Deal Checklist

As you are probably well aware, I am part of the group British in Italy which was set up to campaign to protect the rights of British citizens in Italy post Brexit. I am very proud to say that one of the members of this group has put together a very comprehensive list (non-exhaustive) of things that you may need to do to prepare for a No Deal Brexit scenario, which after today's meeting in Brussels, seems to be becoming an ever-closer reality.