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Viewing posts categorised under: Inheritance Tax

Tax and residency in Italy

By Gareth Horsfall
This article is published on: 12th January 2015

No 1. Expat tax Grief

Not a week goes by these days, where I am not contacted by someone who has a question about their residency in Italy, and what that means for them fiscally. Either by people who are about to move to Italy or others who have already been living here for some time and want to become ‘in regola’.

The conversation then naturally flows into the minutiae of exactly what are the taxes that need to be paid in Italy.

So, I would write and explain those pesky taxes that apply to expats who have income being paid and/or assets held in other countries. It may act as a good guide for those who are thinking about, or in the process of, doing something about their Italian tax returns for 2014.

Where to start?
Well, firstly I start by confirming that, as a resident in Italy, you are subject to taxation on your worldwide assets and income (with some exceptions). That means that if you are a resident in Italy then you are required to declare your assets and income, wherever they might be located or generated in the world.

If you are in receipt of a pension income, for example, and it is being paid from a private pension provider overseas or a state pension, then that income has to be declared on your Italian tax return (nb. different rules apply to Government service pensions, where tax is generally deducted at source in the country of origin and there is no further requirement to report the income in Italy). If tax is deducted at source in the country of origin, the income must still be declared again in Italy. A tax credit will be given for the amount of tax paid in the country of origin (assuming that country has a double taxation agreement with Italy), but any difference between the tax rates in the country of origin and Italy will have to be paid.

It is a similar picture for income, generated from employment. This is a slightly more complicated issue that depends on many factors and, therefore, I shall not dwell on it here. If you have any questions in this area you can contact me on the details at the bottom of this page.

This is one area where Italy excels above other countries, in that its system of calculation is very simple. As of 1st July 2014, interest from savings, income from investments in the form of dividends and other income payments are taxed at a flat 26%. Capital gains tax is the same rate of 26%.

** Interest from Italian Government Bonds and Government Bonds from ‘white list’ countries is still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means it is more convenient, from a tax position, to invest in Government Bonds in Pakistan or Kazakhstan, than it is to buy corporate Bonds from Italian corporate giants ENI or Unicredit. **

Property which is located overseas is taxed in 2 ways. Firstly, there is the tax on the income and, secondly, a tax on the value of the property itself.

1. Income from property overseas.
Unlike rental property located in Italy, which is taxed at the rate of approx 23% depending on what kind of rental you operate, overseas income from property is added to your other income for the year and taxed at your highest rate of income tax.

There is one advantage to this, in that tax in the country of origin has to be applied to the income in the first instance. Therefore, the net income (after expenses) in the country of origin is added to your other income in Italy for the year. This can be quite useful if the property/ies are investment properties, the expenses are high, the country of origin allows multiple deductions and the net income position is low. However, as I have written before, if you are reliant on the income to live on, then a high net income position (before declaration in Italy) can result in a much lower net amount (after Italian tax) depending on the amount of other income you receive each year. Once your total income for the year moves above €28,000 you enter into the punishing 38% tax bracket in Italy.

This can prove to be a tax INEFFICIENT income-stream for those hoping to live in Italy by relying on income from property overseas.

2. The other tax is on the value of the property itself, which is 0.76% of the value.

However, value must be defined in this instance. For EU based properties, the value is the Italian cadastral equivalent. In the UK (the area I am most familiar with), that would be the council tax value NOT the market value. You will find that the market value will, in most cases, be more than the cadastral equivalent value.

In properties located outside the EU, the value for tax purposes is defined as the market value of the property ONLY where evidence cannot be provided of the purchase value of the property, in which case this would be used instead.

It would not be right that other assets escaped Scot free!

A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. However, from 2014 every deposit account that you own overseas with an ‘average’ balance of €5,000 in it, each calendar year, is taxed at the rate of 0.2% of the average balance throughout the year. This includes fixed deposits, short term cash deposits, CD’s etc. The charge is the equivalent of the ‘imposta da bollo’ which is applied to all Italian deposit accounts each year.

Lastly, we have the charge on other foreign-owned assets (IVAFE). This covers shares, bonds, funds, portfolio assets or most other types of assets that you may hold. The tax on these is 0.2% per annum, (from Jan 1st 2014) based on the valuation as of 31st December each year.

This guide is only meant to be a broad outline of the taxes that affect most expats. It is not a full tax list and does not take into account personal circumstances. It is intended to be a guideline to help you make the right decisions.

My experience over the last 4 years has been, in most cases, that expats will end up paying more by being resident in Italy (which most seem to accept as OK, for the lifestyle they can lead) but, there are often a number of financial planning opportunities, to protect, reduce, and avoid certain taxes, that few take advantage of.

If we haven’t discussed these already or if you would like an initial chat to discover whether any of those opportunities are open to you then please feel free to contact me. There are no fees for enquiries and consultations.

Should I stay or should I go?

By Spectrum IFA
This article is published on: 25th November 2014

Quite frankly I’ve been struggling to think of what to write about this week, but then it suddenly struck me that there has been a recurring theme in a number of my client meetings recently. That theme put simply is, ‘Where will I end my days; in France, or in England?’ This isn’t a popular topic of conversation amongst vibrant, exuberant, middle aged expatriates, but we’re not the only people here. We are in the company of many seasoned expats who’ve been here longer than we have; seen it all; done it before we did, and are feeling a bit tired. Many of them are ‘going home’.

We should pay a lot of attention to this group, because we are going to inherit their shoes. We need to learn from their experiences, and take the opportunity to plan for the time when we will experience what they are going through.

Five years ago, when writing on a similar theme, I think I proffered the theory of the three ‘D’s as the principal reason to return to the UK: death, divorce and debt. I still think that they are valid causes, but I now think that there are many subtle variations to be taken into account, and the biggest addition to the equation is age. Age changes your perceptions; often for the better, but age often also brings insecurity and loneliness. Add to that illness, and maybe bereavement, and you have a powerful reason to examine your reasons to continue to live hundreds of miles away from a family that (hopefully) continually worries about you. In short, no matter how much we pooh-pooh the idea now, the chances are that we may eventually end up being cared for in our final years in the UK rather than in France.

OK, that’s enough tugging at the heartstrings. Why is a financial adviser (yours truly) concerned about where you live, and where you may live in future? The answer is currency, specifically Sterling and Euro. In a previous existence, I was responsible for giving advice to corporate and personal clients of a major High St bank regarding exposure to foreign exchange risk. The basic advice was simple – identify and eliminate F/X risk wherever you can. F/X risk is for foreign exchange dealers; it is gambling. Don’t do it unless you know what you’re doing, and even if you do, prepare to lose money.

On a basic level, eliminating exchange rate risk is easy. Faced with a couple in their 50’s relocating to France with a healthy investment pot behind them and good pensions to support them in the future, I will always ask ‘Where do you intend to spend the rest of your days?’ The answer is usually an enthusiastic ‘France, of course. We have no intention of going back to the UK. In fact wild horses wouldn’t drag us back.’ I know this for a fact – I’ve said it myself.

The foreign exchange solution is simple. Eliminate your risk. Convert your investment funds to Euro (invest in a Euro assurance vie). Convert your pension funds to Euro (QROPS your pension and invest in Euro). Job done! Client happy, for now! But what happens 25 years later, when god knows what economic and political shenanigans have transpired, and the exchange rate is now three Euro to the pound and the surviving spouse wants to ‘go home’?

As it happens, I will no longer be his or her financial adviser. The chances are that I will have popped my clogs years ago, but If not, I will most likely be supping half a pint of mild in a warm corner of a pub somewhere in the cheapest part of the UK to live in. (In fact that is poetic licence, as I know full well that I’d probably be being spoiled rotten in my granddad flat in one of my sons’ houses). To draw this melancholy tale to a close, I’d just like to round up by saying that things are rarely as simple and straightforward as they seem. My job is not always to take what you tell me at face value. I know people who’ve been here longer than you. My advice may well be ‘hedge your bets, spread your risk’. I will give you the best possible investment tools for your money and pensions, but I might just surprise you with my recommendation as to what currency those funds should be invested in.

What New Year’s Resolution can I make for 2015?

By Amanda Johnson
This article is published on: 18th November 2014

As 2014 draws to an end and we look forward to spending the festive period with family and friends, there is one New Year’s resolution that you can make which will benefit both you and your family and that is to make sure that you review your finances in 2015.

2014 has seen the UK Government make changes to pensions, the French Government levy Social Charges on areas not previously charged and a joint agreement on Wills which is due to come into effect during 2015. On top of this, there is constant media concentration on whether the UK is better off in or out of the EU. Bearing all of this in mind, it is worth taking advantage of a free financial review to ensure your savings, investments & pensions are working for you in the most tax-efficient manner and that they match your goals and aspirations for the future.

A free financial review will include the following areas:

  • Investments – to ensure they are as tax efficient as possible
  • Inheritance tax – to minimise the amount of inheritance tax imposed and increase your say in where you money goes after you die.
  • Pension planning – putting you in better control of planning for your future

Whether it has been a while since you last looked at your finances or you are unaware of how changes both in the UK & France could affect you, a decision to take a free financial review could be one of the best New Year’s resolutions you can make.

Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please call or email me on the contacts below and I will be glad to help you. We do not charge for reviews, reports or any recommendations we provide.

Have a Merry Christmas and a very Happy New Year.

Have you or someone you know had to pay Spanish non-resident inheritance tax since 2010?

By John Hayward
This article is published on: 11th November 2014


Further to the judgment made by the European Union Court of Justice (ECJ) on 3rd September 2014, that Inheritance and Gift tax rules in Spain were discriminatory between residents and non-residents, several key firms of accountants and lawyers have implied that anyone who has been subject to the higher non-resident rates in the last 4 years could make a claim.

There has not been any formal approval by Spain but proposals are to treat those non-Spanish tax residents living in the European Union (EU) or the European Economic Area (EEA) as if they lived in one of the autonomous regions of Spain where tax rates tend to be heavily discounted. The region will be determined by where you have spent most time in the last two and a half years or by where the majority of your Spanish assets are situated if you live outside Spain.

Gifts outside the EU or EEA to a Spanish resident could be subject to the rules of the autonomous region where the recipient has his/her residency.

Although the changes have not yet been formally approved, lawyers are submitting tax returns on the basis that the qualifying non-resident will receive the tax advantages of the relevant autonomous region.

This will mean that, for example, children living outside Spain, inheriting from parents in Spain, will no longer have the much higher (generally) “National” Spanish taxes to pay. Parents will be able to gift property to their children without necessarily needing to make expensive tax avoidable arrangements.

However, not all autonomous regions are so generous with their discounts. Whereas Valencia offers very large discounts to all direct family members, Murcia, next door, only offers significant discounts to those under 21. Also, there are limits on discounts in most, if not all, regions and so they may not cover all of the assets. Therefore it is extremely important to have assets positioned in the most tax efficient manner. This needs to be legal as well.

How can we help?

1/ If you or someone you know has paid inheritance tax on money from an EU or EEA resident who has died in the last 4 years, you may be able to make a reclaim. We have lawyers who can help with this on a no win, no fee, basis. (We are not tax advisers)

2/ We are experienced in helping you arrange your finances in a Spanish tax compliant manner, helping you and your loved ones to reduce the impact of Spanish taxation.

How much is Inheritance Tax in Spain?

By John Hayward
This article is published on: 23rd October 2014

There are two sets of rules that could apply; one by the autonomous region and one by the State. For these purposes I will focus on my region, the Valencian Community, which covers the provinces of Castellón, Valencia, and Alicante.

There are several factors which determine how you or your estate is treated. These include;

  1. Your relationship to the deceased or the beneficiaries.
  2. Country and/or region the different parties are resident.
  3. How much pre-existing wealth the beneficiary has.

Unlike the UK, where the total estate of the deceased is taxed after allowances, in Spain it is the individual inheritor who is taxed.

State rules

  1. Basic allowance of €15,956.87 for those who qualify.
  1. 95% reduction on the value of the main residence (max. €122,606.47). The property cannot be sold for 10 years from the date of death to retain this reduction. If sold within 10 years, the tax will be recalculated. This reduction only applies to married couples and close family.

Valencian Community rules

If you are resident in the Valencian community you, or your beneficiaries, can benefit from much higher allowances and less restrictions.

  1. 95% reduction on the value of the main residence (max. €150,000). This cannot be sold for 5 years from the date of death to retain this reduction. If sold within 5 years, the tax will be recalculated. Again, this reduction only applies to married couples and close family.
  1. €100,000 allowance for each qualifying individual. The allowance is more for younger children.
  1. 75% reduction on the final tax bill.

 Example (Husband (deceased) and wife resident in Valencia)

Main residence value                                    €350,000

Wife inherits husband´s half                        €175,000

less 95% reduction (up to €150,000)            €142,500

Net value                                                € 32,500

less Tax allowance                                    €100,000

Result?                                                 NO TAX TO PAY*

If the property was sold within 5 years, or the wife did not want the restriction of having to keep hold of the property for 5 years, the tax bill would work out to about £8,500. However, this would then be reduced by 75% (as she is resident) giving a net tax bill of just over €2,000.

For a non-resident, the tax bill would be around €23,000.

This is a simplified example but it illustrates the enormous difference in tax treatment for residents and non-residents. For a resident couple, there is not likely to be a huge potential tax bill. The problem comes after this when the non-resident children and grandchildren inherit. Spain is under pressure to equalise the rates charged for residents and non-residents and there could be changes in 2015.

 If you would like to know how much inheritance tax you or your loved ones could be obliged to pay, and look at ways at reducing or even negating the tax, contact your local adviser.

Please note that these rules are subject to alteration. We are not employed as tax advisers.
*There could be capital gains tax to pay.
Source: Generalitat Valenciana

Inheritance Planning in France

By Spectrum IFA
This article is published on: 15th August 2014

If you are resident in France, you are considered also to be domiciled in France for inheritance purposes and your worldwide estate becomes taxable in France, where the tax rates depend upon the relationship to your beneficiaries.

There are strict rules on succession and children are ‘protected heirs’ and so are entitled to inherit a proportion of each of their parents’ estates. For example, if you have one child, the proportion is half; two children, one-third each; and if you have three or more children, then three-quarters of your estate must be divided equally between them.

You are free to pass on the rest of your estate (the disposable part) to whoever you wish, through a French will and in the absence of making a will, if you have a surviving spouse, he/she would be entitled to 25% of your estate.

If you are not French resident, but own property in France, the same French inheritance rules and tax rates will apply in respect of that property – in effect, as if you were French resident.

You may also be considered domiciled in your ‘home country’ and if so, this could cause some confusion, since your home country may also have the right to charge succession taxes on your death. However, France has a number of Double Taxation Treaties (DTT) with other countries covering inheritance. In such a case, the DTT will set out the rules that apply (basically, ‘which’ country has the right to tax ‘what’ assets).

For example, 1963 DTT between France and the UK, specifies that the deceased’s total estate will be devolved and taxed in accordance with the person’s place of residence at the time of death, with the exception of any property assets that are sited in the other country.

Therefore, for a UK national who is resident in France, who has retained a property in the UK (and does not own any other property outside of France), the situation would be that:

  • any French property, plus his/her total financial assets, would be devolved and taxed in accordance with French law; and
  • the UK property would be devolved and taxed in accordance with UK law, although in theory, the French Notaire can take this asset into account when considering the fair distribution of all other assets to any ‘protected heirs’ (i.e. children).

 If a DTT covering inheritance does not exist between France and the other country, with which the French resident person has an interest, this could result in double taxation, if the ‘home’ country also has the right to tax the person’s estate.

Hence, when people become French resident (or own French property), there are usually two issues:

  • how to protect the survivor; and
  • how to mitigate the potential French inheritance taxes for other beneficiaries.

 At this point, there are probably many people saying “but the law has changed and now I can leave my assets to whoever I wish”.

This, of course, refers to the fact that legislation has been passed by the European Union, which will give non-French nationals, who are resident in France, the ability to choose the succession rules of their country of nationality, rather than being subject to the French rules. However, this will not be effective until 17th August 2015 and even at this stage, following analysis by the international legal profession, certain difficulties with the practical application have already been identified.

A big issue, however, is that when the EU legislation is in effect, this will not change the inheritance tax rules that apply. Therefore, even if we have the freedom to decide who inherits our estates, this will not reduce the potential inheritance tax liability. Hence, there will still be a need to shelter financial assets from French inheritance taxes.

As concerns protecting the survivor, currently, there are a number of solutions that exist in France. For example:

  • You can change your marriage regime to one of “Communauté Universelle avec une clause d’attribution intégrale de la communauté au conjoint survivant”, so that all of your combined assets are held within a ‘community pot’. Subsequently, on the death of the first person, the assets in the ‘community pot’ are transferred to the survivor with little administration, thus, providing full protection for the survivor.

    However, the downside of taking such a course of action is that your children will only have one set of inheritance allowances from the surviving parent (€100,000 per child) and so depending upon the value of your combined estates, this could result in a potential French inheritance tax bill. Therefore, an extra solution may be needed for financial assets, in order to mitigate the potential inheritance tax bill for your children or other beneficiaries.

    In any event, this possibility is not usually open to couples who have children from previous relationships, since step-children may challenge such an arrangement.

  • When purchasing property, it is possible to do this ‘en tontine’. Subsequently, on the death of the first person, it will be considered that the property has been owned by the survivor since the outset. However, this does not provide protection for financial assets and so an additional solution is needed.

    Furthermore, a potential disadvantage of purchasing a property en tontine exists, if either (or both) of the couple have children and the natural parent of those children is not the survivor. This is because the step-children will no longer be protected heirs and so will not have any right to inherit a share of the property. Should the step-parent subsequently leave the disposable part of his/her estate to the step-children, they will be faced with a French inheritance tax bill of 60% above an allowance of €1,594 (2014 rate).

  • You can make a ‘donation entré epoux’, which provides for the survivor to have outright ownership of the disposable part of the deceased’s estate and usufruit (life use) of the remainder.

    For property, the ‘right of use’ is easily definable, since the survivor can live in the property, receive any rental income and make any alterations necessary. However, he/she cannot sell the property, without the agreement of the other ‘shareholders’ and would have to distribute their share of the proceeds to them, when the property is sold.

    For financial investments, keeping the ‘right of use’ is complicated and often creates problems. There can be doubt as to whether the survivor can draw capital as well as income and what the ‘income’ actually signifies. Hence, it is preferable to find another solution for financial assets.

  • It is possible to enter into a ‘family pact’ with your children. This is a complex arrangement, whereby the children effectively agree to give up their French inheritance rights, at least until the death of the survivor. However, this gives the survivor greater control over assets and keeps the step-children’s potential inheritance tax bill to a minimum.

    Since giving up inheritance rights is considered to be such a serious matter in France, two Notaires would be involved in this process – one of whom would represent the children and thus, would be appointed by the Association of Notaires.

Whether or not any of the above solutions is the right one for you will depend upon your personal situation and, in effect, the value of your combined estates. In any event, all of the above must be carried out at the Notaire’s office and so it is very important to take the Notaire’s advice on the solution that is best for your particular situation.

As concerns potential inheritance taxes, fortunately, French inheritance tax between spouses (and partners who have entered into a Pacte Civil de Solidarité, commonly known as a PACS) was abolished in 2007, and so this is not an issue for the survivor.

Furthermore, the allowance between a parent and a child is reasonably generous at €100,000. However, at the other end of the scale, i.e. for ‘non-related persons’ (which includes step-children), the tax rate is 60% on anything inherited above €1,594.

In reality, there is little that can be done to mitigate any potential French inheritance tax bill in respect of property assets, once the standard French allowances have been used up. Hence, in such a situation, it becomes very important to shelter financial assets, as part of the inheritance planning solution.

This can be done by using Assurance Vie, which is highly beneficial for:

  • protecting the survivor;
  • mitigating the potential French inheritance taxes for your beneficiaries; and
  • providing you with control over who receives your financial assets after death

For a quirk of historical reasoning, the benefits payable on death from an Assurance Vie investment, fall outside of your estate. For amounts invested before age 70, each beneficiary (whatever their relationship to you) is entitled to a tax-free allowance of €152,500 and taxation is limited to 20% on any benefit paid above this amount (although a higher tax rate of 31.25% applies for amounts exceeding €700,000 per beneficiary).

There is no limit to the number of beneficiaries that you can name. Hence, whatever your family situation, it is possible to pass on your capital to whoever you like, without them suffering excessive rates of French inheritance tax. Thus, the survivor can be protected and the capital can subsequently pass to your other beneficiaries, following the death of the survivor.

For amounts invested after age 70, the inheritance allowance for all of your beneficiaries is reduced to a total of €30,500 (plus the investment return on the total amount invested). In effect, therefore, it is only the amount invested that exceeds €30,500 that would be taxed at standard French inheritance tax rates.

Sadly, social contributions are now chargeable on any gain in the policy paid out as a death benefit. Despite this charge, this type of investment is still highly effective for inheritance planning, particularly since Assurance Vie is also personally tax-efficient, since the tax treatment is more favourable than most other types of French investments.

Inheritance planning is a highly specialised and complicated subject. Everyone’s family situation and level of wealth is different and it is very important to seek professional advice, so that the best course of action for you can be established.

The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of French taxes.

The Spectrum IFA Group advisers do not charge any fees for their time or for advice given, as can be seen from our Client Charter

Inheritance and expats living in France

By Spectrum IFA
This article is published on: 4th August 2014

Quite a few of my meetings with clients new and old recently have focussed on the thorny issue of inheritance.  I think most of us are aware that this can cause problems for expatriates living in France.  More recently some of us seem to think that the problem is about to go away.  It isn’t.

What is true is that we will be able to adopt the laws of succession of the country of birth over the country of residence from August next year.  What we have to realise though is that although this is indeed a relaxation of the strict Napoleonic succession code, there are no plans to change the taxation structure that goes with it.  Whilst we will then be free to write estranged children (a sad but relatively common problem) out of our Wills, leaving substantial amounts of money or property to non-blood relatives will arouse glee in the ‘fisc’ as they will pick up 60% tax on the vast majority of it.

At this point many of you will be expecting me to veer off on my favourite tangent and harp on about how assurance vie can be the answer to all these ills, but I’m not going to.  If that disappoints you, please feel free to drop me a line and I’ll rectify that situation.

Instead I’m going to stay on inheritance, because there are a few other aspects to this inevitable situation that some of you aren’t sure about.  At present, children are ‘reserved heirs’.  They enjoy special rights, and they have relatively generous tax free allowances that they can use from both parents.  Rather unfairly though, step-children do not share these rights.  If you die and leave an estate to your stepson or stepdaughter, he or she will pay the full tax rates, with no child tax free allowance.

Another inheritance issue that trips some of us up is what happens when we inherit from our own relatives.  Succession tax is payable by a French resident who receives a gift or inheritance and who has been resident in France for at least 6 out of the 10 previous tax years. That’s the bad news.  The good news is that under specific provisions laid down by the UK/France Double Taxation Treaty, we are exempt from this tax law as long as the relative was not also a French resident. So if we inherit from a parent, or in fact from anyone who lived in the UK, we do not have to declare this for tax purposes in France.  If that benefactor was a French resident though, be prepared to fork out a substantial amount in succession tax.

These are just three of the common areas of confusion that I come across regularly in my discussions with clients.  There are many more complicated issues that need to be addressed if you want to have a trouble free transfer of assets when you or your loved ones die.  This can be a self-educating process, especially if your family circumstances are relatively straightforward.  If not, the best person to approach to establish the facts is your notaire.  If your French isn’t up to it, find a notaire who speaks English.  There are plenty of them about.

In many cases your financial adviser should be your next port of call, specifically to put in place financial strategies that can help circumnavigate many of the problems.  Assurance vie will probably figure highly in this process. It is the ‘aspirin’ that cures many a financial headache.