Viewing posts categorised under: Italy

All this talk of a flat tax

By Gareth Horsfall
This article is published on: 8th June 2018

The current political environment in Italy is one which I find very interesting, notably in how it is perceived in foreign media and presented to us through the usual media outlets. In particular, I reference the constant use of the word ‘Populism’ and ‘Populist Government’. I confess that I had to have a quick look at the definition of populism before writing this Ezine and was interested in finding out that the exact defintion, according to Wikipedia, is:

‘Populism is a political philosophy supporting the rights and power of the people in their struggle against a privileged elite’

I have a confession to make that if I can pick and choose only this broad defintion of Populism then I think I can fit myself into a part of the populist ideal. (Clearly it is more complicated than this but I am merely trying to make my point, and as a regular reader of my E-zine’s you will understand my usual approach!)

However, I think it is worth exploring the idea that the Lega and M5S coalition have put together of a flat tax. Although a flat tax for eveyone, no matter how rich or poor is completely obscene in my opinion the ‘flat tax’, proposals, which will launch at 20% for businesses as of July 1st 2018 and 15% – 20% on 1st Jan 2019 for individuals, assuming the Government holds together, actually make a lot of sense to me.

A radical reform of the Italian income tax system is about to take place, and one which is long overdue in my opinion. Not for any populist reasons, but for more practical reasons which I will expand on below.

The proposed flat tax regime
If you want to have a look at the Contratto per il Governo di Cambiamento, then you can do so HERE. It makes interesting reading, if not full of more blurb than actual facts at this stage. However, its a start.

So, going back to the issue of the flat tax. The proposal, soon to be put into force, is to reform the tax regime into 2 flat tax rates, namely 15% and 20%. This sounds very new and certainly will win a lot of those populist votes. But first let’s take a look at how income is currently spread in Italy and the following chart shows just who it would affect:

It’s quite interesting to note from this chart that 80% of the tax paying population of Italy earn up to €29000. The median declared income is €19000pa. Those may sound strange numbers but when you consider the current Italian tax rates (see chart below), you can start to form an idea that there is probably a little bit of fiddling of the figures. After €28000pa in reddito complessivo the tax rate jumps from 27% to 38%. With this in mind, the proposal of a flat tax could potentially bring in alot of, currently, undisclosed (let’s call it what it really is: ‘in nero’) money to the Government coffers.

A QUICK REMINDER OF ITALIAN INCOME TAX RATES
(IRPEF – Imposte sul reddito delle persona)

€0 – €15000 = 23%
€15000- €28000 = 27% (€3450 + 27% on the part over €15000)
€28000 – €55000 = 38% (€6960 + 38% on the part over €28000)
€55000 – €75000 = 41% (€17220 + 41% on the part over €55000)
over €75000 = 43% (€25420 + 43% on the over €75000)

How might it work in practice?
The new proposal is to have a flat tax of 15% on a combined ‘reddito famigliare’ of upto €80,000pa. If your ‘reddito famigliare’ is above €80,000pa then the flat tax rises to 20%.
A proposed maximum tax of €3000 would apply for every member of the family where they have a individual ‘redditto complessivo’ of no more than €35000pa. This would be limited to families where the ‘redditto famigliare’ is between €35,000- €50,000 pa.

In short, the most generous tax deductions are for those who have a ‘redditto famigliare’ between €40000 and €60000pa.

A straniero example……
This all sounds very exciting and some what overly generous for a country which has historically taxed its citizens up to the eyeballs. However, let’s use an average straniero example to see what difference it would make.

Let’s assume that we have a retired couple, with state pensions (€8000pa each) and private pensions of €18000 and €3000 respectively. They also own a property in their home country which generates a UK income of €8000pa (jointly owned). They have investments and savings, but for the purposes of this example they are not relevant as the proposed measures are for income tax only.

Under the current regime the income of each individual would be subject to taxation.

Spouse 1: €8000 + €3000 + €4000= Total €15000pa The tax rate applicable would be 23% therefore the tax would be €3450

For the purposes of this example I am not including any benefits, or credits that might be avaiable to any one individual or another

Spouse 2: €8000 + €18000 + €4000 = €30000pa Spouse 2 exceeds both band 1 and 2 and will enter the higher rate tax bracket creating a taxable liability of €7720

THE TOTAL INCOME TAX BILL WOULD BE: € 11170 per annum

Under the new proposals both spouse 1 and spouse 2 would pay a flat tax of 15% on their combined income , meaning a total tax bill of €6750

A SAVING OF €4420pa

Let’s take a breath and calm down for a moment
So, before we all start getting very excited we all know the Italian Government is not the most coherent at the best of times and we are in an unprecedented era. It may be that this proposal is watered down yet and we get a half way house offer, but I expect that simplification and lower tax rates are on the cards. In the end the country still has to balance the books and attract foreign investment. If they don’t have enough money coming into the Government coffers to keep the system running smoothly (for lack of a better word :0)) then the money will soon dry up and punitive tax rates will have to be imposed to reap that which has been lost.

My soap box moment
And so I move onto my favouritie part of this E-zine. My soap box moment. You see, I have been wanting to write this formally for a long time but never really had the opportunity to do so. I would go on record as saying that I am actually in favour of this radical overhaul of the Italian tax system and whilst I see this proposed flat tax regime as being a little unequally distributed, I do think its necessary and despite what the bankers, economists and bureaucrats tell us, I actually think it would be a good thing for Italy.

The entrepreneurial zone
I have always waxed lyrical that, what I like to call the entrepreneurial zone, in Italy, is completely dead. Any good economics book will tell you that 80% of employment and growth in a society comes from small to medium sized businesses. That is the shop that opens and gets so many customers that they need to employ a young person to manage the business in the mornings, or a new online business which grows rapidly and needs to employ 5 new people to manage operations. It’s worth repeating that 80% of growth in an economy and job growth comes from this area. Not the Vodafone’s of this world or the multitude of other multinational businesses that pop up on the high street. It’s the small businesses and one man bands that grow into medium sized firms that cumulatively turn over billions in revenue each year. This is real growth. And this is what Conte ( the new Prime Minister) talked about in his first address to Parliament when he said that he wanted Italy to grow its way out of debt and not have to impose more austerity. He is absolutely right. The economics speak for themselves.

Which brings me back to the entrepreneurial zone. This is the area which I think is the most important. To take a business from nothing: an idea, a start up, to revenue of €50,000 each year and onto €250,000 each year you need incentive. It is in the Governments’ interest to incentivize you because you are going to employ the people and pay the taxes that will contribute towards 80% of the running of that country. And from there you may have the skills to turn that business in a multi million euro revenue business employing hundreds of people and contributing back even more into the running of the society. The problem with Italy is that after €28000pa in revenue they effectively chop you off at the knees (the tax rates rise astronomically + there is the dreaded social security contributions to pay. INPS) and let you see if you can hobble along and survive whilst they come running after you to chop off your arms, and then take the rest. It’s like being chased by a mad axe man without your legs and seeing if you can hobble faster than he can catch up with you before he hacks the rest off. It just doesn’t work. In my opinion, this is one of the main problems in Italy and why I think both Di Maio and Salvini have got the right idea when it comes to taxation. (The rest of their policies are open to debate, although some of those also have a lot of merit!)).

I am reminded of the conversations I regularly have with clients who recount stories of their children who set up businesses in Italy and either struggle on barely being able to keep the businesses afloat and or eventually closing down. A young business needs all the revenue it can get in that ‘ entrepreneurial zone’, that area between €0 and €100,000 pa. If a business is going well most of that income is going to be re-invested anyway and used to employ people or purchase goods and services. Europe has to support Italy at this time and allow that zone to flourish and provide opportunities to young and old entrepreneurs alike.

So who is responsible for change
There is always a counter argument for every case and clearly in this case, given the cultural back drop to Italy’s tax collection issues there will be economists who will argue that if income tax revenue were to drop drastically by lowering rates so much then how will Italy, ‘The State’, balance its books, after all there is nothing to say that people will suddenly start declaring all their income because the tax rate is more favourable. That is why the proposed tax regime has to be followed by some hardline clampdowns on tax evasion. Otherwise, it just won’t work.

I am going to follow these proposals closely, and feed back to you, to keep you abreast of any legislation changes. (Watch out for the summer months as they like to slip new laws in whilst everyone is on holiday). I am completely in favour of a total overhaul of the Italian tax system and dispute what the media, economists, and supposed experts say (I sound like a Brexiteer). I think drastically cutting tax rates in Italy, whilst having a short term impact on Government revenue would attract foreign investment in droves ( I mean if you had the chance to set up a factory in Huddersfield or one in Umbria, which would you choose?), it could increase investment rapidly, create jobs, create subsidiary businesses servicing the bigger ones, incentivize larger business to relocate because of the tax rates and could create a new economic boom for Italy. That being said, if it isn’t put into place with some heavy Governmental supervision then it could all fall apart and Italy’s days in Europe would be numbered. And therein seems to be the folly of the whole idea. Europe, whilst I love the European project dearly, has not treated countries like Italy favourably and should it continue on its current path without allowing any kind of change and only implementing austerity, then the likelihood is that Italy would eventually decide to Italexit.

Government has to lead
Italy, like any government around the world has to take the lead in forcing through sensible change. The young business people I know who are barely making ends meet are never going to fully declare every euro they earn when they have families to feed, medical treatments to take care of and childrens schooling costs to pay. And given the choice of making a ‘few’ euros ‘in nero’ and being able to look after the family versus paying into a corrupt state which merely extracts the money from you by osmosis for its own nefarious means, the choice is simple. Most families, if not all, will take that risk. They just have to. Or they move abroad!

So I am in favour of Di Maio and Salvini’s tax plans. I hope they manage to find a solution that will help everyone, mainly the poor and the entrepreneurs who want to prosper but don’t have the ability to do so because of draconian tax measures which should have been ditched long ago. It won’t be an easy ride, but I hope it’s a success. And in the end, should it pay off it may just keep Europe together. Can you imagine Di Maio and Salvini going down in the history books as the saviours of Europe!

(You don’t need to write to tell me that my artistic licence has been abused in this article, just enjoy and let’s see what happens. I, for one, am moderately positive about the future if they can bring about positive change in the tax system in the way in which they are proposing to do).

Given the proposed changes in taxes in Italy, it will be an important time to take a look at your own tax and financial planning arrangements and make sure that they are as tax efficient as possible.

Common Reporting Standard – Italy

By Gareth Horsfall
This article is published on: 2nd May 2018

02.05.18

You will be aware that since January 2016 the Common Reporting Standard has now been in effect. This is an OECD agreed standard for most nations around the world to automatically report tax and financial information of individuals, to one another, on a regular basis. This circumvents the historical need for the individual to accurately report their financial information on a tax return to ensure that the relevant level of tax revenue is collected. Now, this information is reported directly to the tax authorities and the information declared in your tax return needs to ‘tally’ with that which the authorities, theoretically, already know.

So, were you one of the 30,000 at the start of 2018? I was !
You may wonder what this relates to? In January 2018 it is reported that the Agenzia delle Entrate sent out up to 30,000 letters to people whom they knew had money held overseas, to ask them to report accurately the money they held outside Italy and to ensure a ‘ dichiarazione integrativa’ was completed before the next tax filing date in order to correct any discrepancies. I was the lucky recipient of one of those letters.

In regola
Thankfully my overseas financial affairs have always been ‘in regola’ with the Italian authorities. However, the letter prompted me to take a closer look to ensure I had not missed anything. Indeed, it turned out that I had missed a grand total of £500 from my last Italian tax return.

However, this does beg the question whether the Agenzia delle Entrate knew about this or whether it just sent a generic letter ( all the letters were the same and generic in nature) to put the cat amongst the pigeons, to coin a phrase. I am of the mind that it is the latter, but am I willing to take the risk? Absolutely not.

Are you paying more than you need to be?
My experience over the years has been, that in most cases, you may be paying more than you need to. There are a number of financial planning opportunities, to protect, reduce, and avoid certain taxes in Italy, that few take advantage of unless you undertake a closer look at your full financial affairs whilst living in Italy.

If you have any questions about the content in this E-zine or others then you can contact me on gareth.horsfall@spectrum-ifa.com or on cell: +39 333 649 2356

Are taxes in Italy really ‘that’ complicated?

By Gareth Horsfall
This article is published on: 30th April 2018

As I walk my son to school in the morning we have the opportunity to walk through the palazzo of an ‘Archivio di Stato’ in the centre of Rome. It is a real piece of classical architecture with cloister like columned walkways surrounding a central open space with a tower adorned with various statues at one end. However, it is not this amazing building which captures my attention each morning, but a plaque on the wall as we walk through the columned part. The plaque reads: Alluvione di 1870. The marker on the wall must be approximately 1 metre 50cm high. To think that the water reached that level is quite unimaginable. And thinking about this each day naturally leads me to the subject of floods. My personal flood is the annual flood of emails into my inbox, at this time of year, asking for clarification on taxes in Italy.

So this article is also about laying down some of the details of those pesky taxes that we all have to pay in Italy. Remember that the submission of your tax information should be formalised by the end of May. If you use a commercialista, even earlier, to allow them time to go through your information, ask questions and report it correctly. The first payment for the year is due on June 16th.

So, where do we start?
As a fiscally resident individual in Italy you are subject to taxation on your worldwide assets and income (with some exceptions), and realised capital gains. This means you are required to declare your assets and income and realised capital gains, wherever they might be located, or generated in the world.

Fiscal residency is going to become very important post BREXIT for Britons who reside in Italy. Questions have arisen as to what fiscal residency means. For a defintion you can read my post HERE

Tax on income
If you are in receipt of a pension income and it is being paid from a ‘private’ pension or occupational pension provider overseas or you are in receipt of an overseas state pension then that income has to be declared on your Italian tax return. If you have paid tax already on that income then a tax credit will be given for the 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.

** Government service, civil service and local government pensions of any kind (eg. Teachers, Nurses etc.) are only taxed in the state in which they originate, and tax is deducted at source in the country of origin. They are not taxed in Italy unless you become an Italian citizen **

It is a similar picture for income generated from employment. This is a slightly more complicated issue that depends on multiple factors. If you have any questions in this area you can contact me on gareth.horsfall@spectrum-ifa.com

Investment income and capital gains
As of 1st January 2018, interest from savings, income from investments in the form of dividends and other non-earned income payments stands unchanged and are taxed at a flat 26%. Realised capital gains are also taxed at the same rate of 26%.

(Interest from Italian Government Bonds and Government Bonds from ‘white list’ countries are still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means that you pay less tax as a holder of Government Bonds in Pakistan or Kazakhstan, than a holder of Corporate Bonds from Italian giants ENI or FIAT).

Property Overseas
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.

The income from property overseas.
Overseas NET property income (after allowable expenses in the country in which the property is located and taxed) is added to your other income for the year and taxed at your highest rate of income tax.

I would like to clarify what I mean by ‘net property income’. If we take the UK as an example, this means that you MUST make a tax declaration in the UK first. The UK property is a fixed asset in the UK and therefore must be treated to UK tax law before any declaration in Italy. After you have deducted allowable expenses in the UK and paid any tax liable in the UK, the NET property income figure must be submitted in your UK tax return.

Where many properties are generating all of your income this can prove to be a tax INEFFICIENT income-stream for residents in Italy. It is better to have a diversified income stream to maximise tax planning opportunities.

I will also add some comments here in that I often hear from people who are told by their commercialista that no expenses can be deducted in Italy. This is correct. What they mean (or what I am interpreting that they mean) is that you cannot deduct the UK allowable expenses directly through the Italian tax return. This has to be done first in the UK tax return, in this example. This is correct process. However, it does not mean that the expenses cannot be deducted per se. It just means they have to deducted in the revelant tax return first before reporting the NET result in Italy.

** Tax credits will be given for any tax paid in another country in order to avoid double taxation, where a double taxation treaty exists with Italy.

2. The other tax is on the value of the property itself, which is 0.76% of the value. (IVIE)
Value must be defined in this instance. For EU based properties, the value is the Italian cadastral equivalent. In the UK that would be the council tax value NOT the market value. This value is always expressed asa range of values rather than a specific one. You will find that the market value will, in most cases, be more than the cadastral equivalent value.

For properties located in other European countries, for example France, you will find that they may have a similar ‘cadastral’ value. Where this value is calculated in the same way as Italy, a tax credit is offered against any IVIE tax payable in Italy. The tax credit is not applicable to UK properties as the tax is due on the occupant of the property and not the owner.

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.

** BREXIT FINANCIAL PLANNING OPPORTUNITY**
After the UK exit from the EU, the cadastral equivalent value of a property in the UK will revert to the original purchase price, where evidence can be provided. Given that UK councils are likely to review their council tax bands in the comings years to fund shortfalls in their accounts, this could mean less tax to pay in Italy.

Taxes on Assets

1. Banks accounts and deposits
A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. 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.

The rules regarding whether you need to declare the account can be found on my blog post ‘IF IN DOUBT, DECLARE THE ACCOUNT‘

I am of the view that if you have a bank account in the UK with more than €5000 in it and/or a regular income being credited to it, then you should declare the bank account in Italy regardless of the tax reporting requirements. For the sake of the tax of €34.20, it is not worth taking the risk.

2. Other financial assets
The charge, IVAFE, is levied on other foreign-owned assets which covers shares, bonds, funds, portfolio assets, cryptocurrency, gold deposits, art work or most other types of assets that you may hold. The tax on these is 0.2% per annum based on the valuation as of 31st December each year.

Also remember that if you have a portfolio of managed assets that are NOT held in an a suitably compliant Italian Investment bond, then all the separate funds/shares/assets are considered “individual” and MUST be reported individually on your tax return each year. That also includes reconciling any income/dividend/distribution payments that have been made and also any capital gains that have been realised. A reference to the Banca D’Italia exchange must be made for each transaction on the correct date.

3. Pensions
It is worth noting here that for any UK style private pension or occupational pension arrangements, where the pension structure is an irrevocable trust, then the tax treatment is 2 fold.

a) any income that you draw from the pension each year is taxable at your highest rate of income tax in Italy.

b) the fund itself needs to be reported under ‘monitoraggio’ of trusts section of the Quadro RW. Failure to do so could result in fines. Although highly unlikely, you never can be sure.

This is a concise list of the taxes that affect most of you.

Preparing ‘THE’ folder

By Gareth Horsfall
This article is published on: 10th April 2018

10.04.18

Living in a foreign country is never easy, but have you thought how complicated it would be for your family if you die suddenly?

I am writing this E-zine after my weekly food trip to the Mercato Trionfale in Rome. I believe it to be the largest indoor market in Rome. It certainly has a massive choice of fruit, veg, meats, fish and much more. For any foodies out there, it is well worth a visit. However, my motivations for going this particular morning were not necessarily the food, but to go and have a natter with the people on the ‘bancarelle’. As is the norm at markets you tend to have your favourite stalls and you get to know the people and whilst buying the groceries you can stop and put the world to rights, talk about the weather etc. I love it because it is a break from the everyday routine and it provides me with that connection with people outside work.

So, when I got a call from a lawyer recently to tell me that one of my clients had died, (after a tragic and prolonged illness) I felt I had to go and have a dose of that life infusion once again.

This E-zine is never an easy one to write but I like to throw it out there once a year because I think its important. Ensuring that your papers are in order in the event of your sudden death is incredibly important when living in another country. It will provide you with peace of mind that your loved ones will not have too much difficulty in administering your estate, and your family will be thankful that you did it for them.

The big problem is that as ‘stranieri’ we often have documents spread across multiple locations. The office, a house in another country, with family members and in that old box that no-one dare look in.

The purpose of this Ezine is to outline a proven way of organizing your affairs to reduce stress in the event of your death.

So what is THE folder?

It is a single file (digital or physical) where you keep all of your important personal and financial information together. It allows easy access to these documents in the event that you’re no longer around to help. It is really important to have it in place where one family member takes the lead on the family finances (as I do in our household). That includes paying bills, managing accounts and storing documents.

Is it worth the effort?

Well, I think it is worth the effort. A time of loss can be stressful enough without having to try and piece together the deceased’s financial affairs. This can be a really difficult time for family members.

However, preparing THE folder is much more than avoiding stress; if you leave behind a administrative nightmare you could delay access to inheritors’ access to funds and potentially cost a small fortune in legal fees.

To give you an example of this, the UK Department of Work and Pensions estimate that there is currently more than £400 million sitting in unclaimed pensions pots in the UK.

Which is best…..physical or digital?

This comes down to personal preference. It can be done by either creating an electronic file that survivors can access in the event of death. This file can then be stored on your main computer, in the cloud or on an external hard drive. Alternatively you can use a physical folder to keep all of the important information together.

For what it’s worth, I decided to do both when building mine because my wife prefers paper and so is happier with hard copies of everything. I prefer digital. I have also shared the digital folder with some trusted family members.

Birth, marriage and divorce

Personal birth certificate
Marriage licence
Divorce papers
Birth certificate/adoption papers for minor children

Life insurance and retirement

Life insurance policy documents (including beneficiary nomination forms)
Details of any employer death in service benefits
Personal pension documents
Employer pension details
Annuity documents
Details of any entitlement to state pensions

Bank accounts

List of bank accounts with account numbers, login details, passwords etc
Details of any credit cards
Details of safe deposit boxes

Assets

Property, land and cemetery deeds
Timeshare ownership
Proof of loans made
Vehicle ownership documents
Stock certificates, brokerage accounts, investment platform details, online investment account details
Details of holdings of premium bonds, government bonds, investment bonds
Partnership and corporate operating/ownership agreements (including offshore companies)

Liabilities

Mortgage details
Proof of debts owed

Details of gifts

Dates and amounts/values (potentially helpful when calculating any inheritance tax liability)

Income sources

Make a listing of all your sources of income, especially ones that your family might not know too much about
Employer details
A copy of your most recent tax return or accounts

Monthly expenses

(so they can be maintained if necessary or cancelled if not. Essentially list the fixed costs which would need to continue after death)

Utilities
Insurance
Rent/mortgage
Loans
Subscriptions/memberships

Email and social media account details

Facebook
LinkedIn
Twitter,etc……..

Essentials

Will/testament + details of the legal firm that helped create it, if applicable
Instruction letter
Trust documents
Burial/cremation wishes

Contact details

List of names and contact numbers for: Financial adviser, doctor, lawyer/solicitor, accountant, insurance broker,

How often should ‘THE’ folder be reviewed?

Firstly, it is sensible to note the date that it was last reviewed so that anyone using it has an idea of how up-to-date the details are.

Going forward, reviewing the file on an annual basis should be sufficient.

Online passwords

If you are not comfortable keeping these in your folder, consider using a password management program. A password manager allows you to save all account usernames and passwords in one place. They are then protected using one master key. There a number of them available. I personally use LastPass – www.lastpass.com

This might be a step too far for you given the data breaches that seem to be happening almost daily, notably Facebook. I appreciate that and if you are not comfortable in using such an app then its important to have a physical record some where that can be accessed in the event of your death.

And finally…

Be sure to tell someone about it. There is little point going to the effort of creating such a folder if know one knows of its existence/where to find it…..

Hands off my pension!

By Gareth Horsfall
This article is published on: 27th March 2018

27.03.18

As promised, I thought I would follow up with my last article on the complicated issue of trusts, with a less complicated issue of the tax treatment of pensions / retirement funds in Italy.

The majority of my clients are nearing, or in retirement, and so pensions and retirement plans are very much at the forefront of your minds. For the likes of me, (I am 44 years old this year), I am in the accumulation phase and I need to concentrate on building as much capital as possible for when I get older when I need to convert my earning power into an income for life. There isn’t much to say about the accumulation phase, other than how the actual fund is treated for taxation in Italy, which I will touch on below.

What I aim to achieve in this article is to explain the tax treatment, in Italy, on the income from the various types of overseas pensions / retirement funds which we are mostly familiar with. This information is taken from and I will be expanding on articolo 18 del Modello OCSE which states:

“fatte salve le disposizioni del paragrafo 2 dell’articolo 19, le pensioni e le altre simili remunerazioni pagate ad un residente di uno Stato contraente in relazione ad un passato impiego sono imponibili soltanto in questo Stato”

I will not be going into the more complicated area of taxation of Italian pensions since that is best dealt with by a commercialista. I also want to share some of the various tax stories that I have heard of in the past and clarify the situation.

WHAT IS A PENSION AND WHO OFFRS THEM?
A pension is a type of retirement plan that provides an income in retirement. Not all employers offer pensions. Government organizations usually offer a pension, and some large companies offer them and in the likes of the UK and USA you can have a personal retirement pension / plan. Most people, throughout their working life, will also be making National Insurance / Social securitry payments which go towards a national state pension as well.

WHAT IS THE ITALIAN TAX TREATMENT OF EACH?

The state pension / social security:
I have sometimes been asked if the state pension or social security is non-taxable because it is covered under some kind of double taxation treaty. I remember this being a common question some years ago and wondered if a rumour was going around. Thankfully it hasn’t raised its heads for a while but for the record the state pension /social security of another country, payable to you as a resident in Italy, is taxable in Italy at your highest rate of income tax. If you have other sources of income in retirement then they are added together and the banded rates of income tax applied.

Remember that the income types which are subject to IRPEF (Italian income tax) are retirement income, employment income and rental income.

A QUICK REMINDER OF ITALIAN INCOME TAX RATES
(IRPEF – Imposte sul reddito delle persone fisiche)

0 – €15000	23%
€15000 – €28000	27%	(€3450 + 27% on the part over €15000)
€28000 – 55000	38%	(€6960 + 38% on the part over €28000)
€55000 – 75000	41%	(€17220 + 41% on the part over €55000)
Over €75000	43%	(€25420 + 43% on the over €75000)

The Italian pension credit…….it’s not an allowance!
This is another one of those mis-understood Italian tax benefits. (It would make sense that it is misunderstood because ‘Italian’ and ‘tax benefits’ are not words that often go hand in hand). However, if you are a pensioner (that means a pensioner at state retirement age and not someone who has retired early), then you might be eligible for a tax credit on pension income up to €8000 per annum. At this point I would like to say that this is NOT a tax allowance. It is not the first €8000 of pension income which is non taxable for everyone. That would be nice and has been proposed by some of the possible incoming political parties, but for the moment, not everyone is eligible to receive it.

It means that where you have €8000pa retirement income and below, that you could be eligible for a full tax credit on that amount. i.e the tax is calculated at 23% and then that is given back in your tax return.

The catch is that if you have more than €8000 in total retirement income per annum, rising to €55000pa then the credit is reduced (according to various quotients) to zero. The higher your TOTAL income is the less of the credit you will receive. A total income of more than €55000 per annum means no tax credit.

Government / Local Government / Armed Forces / Police / Teachers pensions etc
This next category is a catch all for any kind of Government or Local authority pension, including Teachers, Police, Firemen, Nurses, Local Authority etc. In effect, where the local or national government of the pension in question is the administrator of the fund.

In this case, if you are a non-Italian resident in Italy, then the pension is not taxable in Italy under the double taxation treaty but only taxable in the state of origin. So, for example. a British Firemen retired and resident in Italy will only have to declare the pension and pay any tax due in the UK under UK tax law. It would not be subject to Italian tax, UNLESS..

…., you are an Italian citizen, i.e have Italian citizenship.. An Italian national living in Italy would be subject to Italian income tax on their overseas local or national pension in the other state. So, in our example above the British fireman, after being granted Italian citizenship would then become liable for Italian taxation on his UK pension. This is something to consider when applying for Italian citizenship. Equally this would apply to anyone who has dual nationality, for example an Italian who has lived and worked abroad for many years and returns to Italy, or someone who has dual nationality through birth right.

Private pensions / Retirement plans / Occupational / Employer pension schemes
Private pensions do not, unfortunately, benefit from the same tax treatment as national or local authority schemes as described above and so they have to be exposed to the full wrath of the Italian income tax rates. They are added to your other income for the tax year and taxed at your highest marginal rate of income tax.

However, I want to expand on this subject slightly, in relation to the subject of trusts which we touched on in my last article.

Definition of a private pension / retirement plan
Before we can accurately define how a pension is taxed we first have to understand its structure. In the case of a UK personal pension, occupational pension and/or retirement plans they are mostly set up as irrevocable trusts. This gives limited powers to the holder of the pension because although you can instruct the trustees to do whatever you want within the tax rules of the country in which it is operated, ultimately the trustee has the final say in what you can do. They wouldn’t normally refuse your instructions to withdrawal capital, for example, but theoretically they could. This is a technical point but one which helps define the taxable liability in Italy.

Essentially, since the pension is a non-resident irrevocable trust, then the rules state that the fund itself is not taxed but any withdrawals would be taxed at your highest rate of income tax. An interesting point is that the fund itself needs to be declared for ‘monitoraggio‘ purposes and specifically your share in that fund. That creates a difficulty in something like a large pension fund e.g. Standard Life, when you need to express your share in that fund. To do that you need to know the value of the total company pension fund in which you are invested and express your fund value as a percentage of it. The truth is that this is almost impossible to find out accurately and so expressing a very low percentage is probably acceptable.

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 here. 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 your contributory life. In the ‘previdenza complementare‘ (PC) the fund is taxable during the life of the fund. 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 tax relieved, then income paid in form of a pension is subject to income tax 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, once you reach state retirement age. 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, in incorrect. If you are in doubt then speak with your commercialista.

That is a basic review of the various types of pension / retirement incomes but is not an exhaustive list and various countries may apply different rules. You may need to check the double taxation treaty of your country for further details. However, all in all pensions are treated like other income, once in retirement and the fund needs to be declared, but not necessarily taxed in the accumulation phase.

If you have any queries about how your retirement income in Italy should be taxed, you can contact me on gareth.horsfall@spectrum-ifa.com or on cell +39 333 6492356

Trust in me!

By Gareth Horsfall
This article is published on: 13th March 2018

13.03.18

Quite recently I was watching the Disney movie Jungle Book with my son. I am sure that you remember the film. You may also remember the snake in the film, named Kaa, who tries on a couple of attempts to eat the ‘man cub – Mowgli’. If you happen to watch the film again you will see that he sings a song to hypnotise Mowgli, that song is called ‘ Trust in Me’.

Like alot of things in life, there are things that trigger the grey matter to start working at a rapid rate and the lyrics to ‘Trust in me’ seemed to resonate with my grey matter on that day. It was all the talk of ‘TRUST’.

You may have been aware of all the talk of offshore trusts in the Panama Papers. Well, you will be grateful that I am not going to go into that in any detail because for most of my clients it has very little to do with them. However, what might affect you is if you hold a trust in the form of a pension, specifically a UK private pension, an IRA, 401K or other US based retirement fund and/or a trust which has been set up in another country which might have the objective of protecting your estate from inheritance tax and or using a trust to pass assets on to family members in the event of your death.

What is a trust?

A trust is basically an agreement between three parties:

The trustee holds the assets, legally, on behalf of the ‘settlor’, who ensures that they are distributed in accordance with the settlor’s instructions. This can save time, reduce paperwork and in some cases avoid inheritance taxes. When something sounds this good, why haven’t we all got one? Because in Italy things are never that simple.

Trusts in Italy
Before I start with the analysis of how trusts are treated for taxation purposes in Italy, I would like to caveat this by writing that if you have a trust and are unsure of its tax treatment then you may wish to seek the advice of a trust lawyer who specialises in this field. The information I have learnt here covers a range of trust tax law, in Italy, which is specific to about 99.9% of clients, but it may not be appropriate for everyone. It is a very complicated area and may need specialist advice.

The issue of trusts in Italy was best summed up by an Italian lawyer who I was asking about this topic some years ago and I asked what is the law surrounding trusts in Italy His reply has stuck in my mind….”there is no real law of trusts in Italy because no one trusts anyone”. If you think about it, he is right. You are effectively giving your assets to another party, on the basis of trust, to distribute them on your behalf. That works well in the UK and the US where trust law is written into the framework of society and universally accepted. However, in Italy, where corruption, fraud and a slow legal system exist there would be little recompense if the ‘trusted’ individual/company ran off with your money.

Different types of trusts
There are many different types of trusts which can be used for various planning purposes but they are almost all unwritten by 2 basic concepts. This is that they are either revocable or irrevocable.

An irrevocable trust is simply a trust with terms and provisions that cannot be changed by the person who set it up (the settlor). This is distinguishable from a revocable trust, which is commonly used in estate planning and allows the ‘settlor’ to change the terms of the trust and/or take the property/assets back at any time in the form of income payments or lump sum withdrawals.

This concept of irrevocable and revocable trusts are the defining factors in the tax treatment of trusts in Italy and why, if you inherit a trust or you set one up before moving to Italy, then it is worthwhile checking to determine which type it is.

In general, the irrevocable trust (the one which CANNOT be modified by the settlor), in Italy, is respected for income tax purposes. The trust is deemed to be the owner of the asset (not the person) and there is a legally defined separation between the person who set it up ( the settlor) and the beneficaries of the monies from it. i.e the person who set it up can’t take money and income out at will and change the terms of the trust as and when they please. This is important in the tax treatment which I will explain below.

Conversely, the revocable trust is ignored for tax purposes and the ‘settlor’ is treated as the owner of the assets and any income from the trust, as if they still held them in their own name. The person who holds the trust is also responsible for disclosing the assets in it to the Agenzia delle Entrate each year, as if they owned them directly. Clearly this is not very tax effective in Italy.

Tax Treatment

The irrevocable trust is certainly the most tax efficient of the 2 types of trust and the easiest one to declare in Italy. The tax treatment is very simple in reality because the trust itself is not taxed, although it must be declared on the Quadro RW each year under the ‘monitoraggio’ section. (and your % share in the trust) Any income distributed from the trust is treated as the income of the individual in the tax year in which it is distributed and taxed at your highest level of income tax. (Capital Gains and non earned income tax of 26% do not apply to this type of financial structure)

The revocable trust, by comparison, is another beast altogether. This type of trust is generally looked through and the assets in it are deemed to be in the ownership of the individual directly.(the settlor). In other words any assumed tax protection by placing assets in trusts is removed because the trust itself can be altered. The Italian authorities have a number of provisions, which if written into the trust deed, could destroy the existence of the trust. These include:

The ‘settlors’ power to terminate the trust, causing a payment back to the settlor or the beneficiaries
The power of the settlor to name themselves as a beneficiary
Provisions which subject the trustee to consent or approval of the settlor i.e effective control of the trust by the person who set it up
The settlors powers’ to terminate the trust early
The provision granting a beneficary a right to a payment from the trust
The provision requiring the trustee to take instructions from the settlor for the purpose of administering the trust assets
The option to change beneficiaries
The settlors powers to distribute or lend income or assets from the trust to persons designated by the settlor
Any other provision, determined by the settlor or benficiary, which appears to limit the administration and distribution powers of the trustee

Assuming one of these provisions is written into the trust deed, then the protection of the trust invalidates the tax protection afforded by the trust and the assets will be subject to same rules as those assets which are held outside a trust.

Direct tax on assets in Italy is 26% capital gains tax and 26% on any income distributions/dividends or interest payments derived form assets, in the year in which they were realised. In addition a tax of 0.2% on the assets themselves as a wealth tax. The tax protection afforded effectively flies out of the window.

What are the alternatives?
For ultra wealthy individuals and companies there are always work rounds to these issues and with enough money you can pretty much construct anything these days to avoid taxes. However, this does not necessarily help the average person who would also like some tax protection for hard earned income and assets that you may wish to pass onto future generations.

The Investment Bond (Polizza Assicurativa Capitalizzazione) is a possible solution. It meets a number of similar criteria such as:

No Italian income and capital gains tax on the fund itself
Distributions are taxed at 26% on the proportional gain of the withdrawal (in some respects this is better than the irrevocable trust in which distributions are taxed at your highest rate of income tax)
The option to name beneficiaries in the event of your death
Continuation options in the event of death
The possibility of regular withdrawals and/or lump sum withdrawals and
A global range of investment options
Lastly, the investment Bond itself is fully reported to the Italian authorities and any taxes paid at source so you don’t have the worry of having to submit the information each year yourself or making mistakes

Summary
The lesson to be learned from this is, that before you do anything, if you have a trust, are a beneficiary of a trust, have set up a trust yourself or had one set up for you, then the first thing you need to do is get a copy of the trust deed and look at your relationship / level of involvement in the trust to determine exactly how it fits into your tax affairs as a resident in Italy. If in doubt, consult a professional.

I am going to elaborate on this subject of trusts in my next Ezine, specifically in relation to UK private pensions and US IRA’s and retirement funds. These vehicles themselves are set up as trusts and therefore have a specific tax treatment in Italy.

IF IN DOUBT, DECLARE THE ACCOUNT

By Gareth Horsfall
This article is published on: 22nd January 2018

22.01.18

The start of the year presents many challenges for me. The start of 2018 presents an interesting challenge that I am not used to. My quandary reminds me of my days at the school swimming pool. The water was always cold. The question was do I jump in and get it over with in one go or do I ease myself into the water gently and take it slower?

The question for me regarding my articles is always what can I write? However, the start of 2018 seems to be an exceptional year in that I have lots of ideas but the biggest question in my mind is how do I ease ‘you’ into these topics?

Well, I can tell you that in my schooldays I was always the jumper. I enjoyed (maybe the use of the word ‘enjoyed’ is a little strong but it was better than the other option for me) throwing myself in and then warming up through vigorous exercise. So it looks as though you are following me in as you read on……

LET’S TALK ABOUT BANK ACCOUNTS
I know that in 2017 you may have received a request from your non Italian bank asking you to provide a T.I.N. for International sharing of tax information purposes. The TIN being the Tax Identification Number or codice fiscale for Italian tax residents. This has caused a lot of concern as bank accounts abroad have often been left undeclared by Italian tax residents for a variety of reasons.

One of the reasons I often hear is that the balance is so low that a declaration is not required in Italy. This could be correct but in this E-zine I want to clarify this law to ensure that you don’t fall under the spotlight with the Italian tax authorities.

So what exactly is the law in Italy regarding the minimal balance which requires a foreign held bank account to be declared?
The law articolo 2, comma 4-bis, del D.L. n. 4/2014, convertito in Legge n. 50/2014, modificato dalla Legge n. 186/2014 states that there is a requirement to monitor foreign held accounts whose maximum total balance in the tax period exceeds €15000. (remember you need to convert to euro if your bank account is in another currency)

This means that if you have a foreign held account that in a calendar year has never exceeded €15000, you are NOT required to comply with the discipline of monitoring. If it has. then the Quadro RW should be completed.

IT’S NOT THAT SIMPLE
However, this is where the confusion begins because this implies that if the balance of the account does not exceed €15000 in the calendar year then no declaration is required. However, the obligation to complete the Quadro RW (declaration of foreign held assets) exists in relation to the average value of deposits into the same bank account, consequently bringing in a new measure of a minimum of €5000 in annual deposits.

e.g. if I were receiving a pension income of £1000 a month into my UK bank account and had outgoings of £900 pm, the balance of my account would never exceed the €15000 in any year, but it would exceed the annual deposit of €5000. (my income payments would be £12000 in the year). Those income payments could be subject to income tax. A declaration of the account should be made.

A CLEAR DISTINCTION EXISTS BETWEEN THE MINIMUM ANNUAL BALANCE OF €15000 AND THE ANNUAL DEPOSITS OF €5000
e.g. I have a dormant account in the UK and the balance is £3000. The account does not receive deposits but earns interest. I must declare the interest in Italy, but the balance of the account has never exceeded €15000 and the deposits do not exceed €5000. Do I still have to declare the account? Well, actually you do! Your commercialista should note it for monitoring purposes but it would not be taxed. However, there is still a requirement to monitor it on the Quadro RW.

CLEAR AS MUD?
My motto is, and has always been:

IF IN DOUBT DECLARE THE ACCOUNT
The best way to look at this is to consider the consequences of declaring versus the sanctions for not doing so.

THE COST OF DECLARATION
If you declare the account the fixed tax on the account is €34.20pa (not including any tax on income payments, interest, or VAT liable payments).

THE SANCTIONS FOR NON DECLARATION
If you don’t declare the account and you are discovered then the sanctions could range from 3-15% of the account balance if it is not a black list country.

If the country is black listed then the sanction is doubled. (6-30%)

IS IT WORTH THE RISK?
For the sake of €34.20 per annum it is probably worth declaring the account.

I would add that I have recently seen 5 letters from the Agenzia delle Entrate sent to different people living in Italy stating that under the Common Reporting Standard International share of tax information agreement, that the agenzia is aware that these people have assets and income payments from foreign financial institutions and that they are investigating why these have not been declared on the individuals tax return.

So, finally, we are left without a doubt that this financial and tax information is now being shared, as if we were ever in doubt.

I fully expect that in the coming months and years that the systems that tax authorities have in place to analyse the financial information they are now receiving will become increasingly more sophisticated and it will eventually be an automatic process should any information that we have declared on our tax returns NOT match with that which they receive from foreign financial institutions. Certainly I don’t foresee a return to the old days when the responsibility was only ours. That same responsibility has now been taken away from us and the automatic share of financial and tax information will only get more sophisticated moving forward.

On that thought, I will leave you will my simple message.

If you haven’t started any financial planning as an Italian tax resident, then start now. You might end up paying more than you need to!

Where are you domiciled?

By Gareth Horsfall
This article is published on: 1st November 2017

01.11.17

As a foreign national living in Italy for many years I find it sometimes confusing to look at where you come from and know where you belong. I rang my prefettura the other day to check on the progress of my Italian cittadinanza application only to be told that I would have to keep checking the Ministero del Interno website to see whether any updates or further requests for information would be required and that no confirmation email would be sent.

Anyway, this got me thinking about the issue of ‘where we belong’ and ‘where we think we belong’. The difference being, one is based on facts and one is based on what we believe to be true.

If I take a cross section of you, my group of clients, and stranieri living in Italy, I could split you into many different groups (it is not an exhaustive list), but a good summary would be as follows:

Foreign nationals married to Italians (like myself)
Foreign nationals who are married/partners with someone of their same nationality
Foreign nationals married/partner with someone of a different nationality
Foreign nationals who are not married

And within this group I could create sub groups of you:

those who don’t intend on returning to your country of origin
those who have made a long term move to Italy but intend on moving away from Italy at some point in the future, mainly for reasons of later retirement when language, health, and maybe grandparenting considerations become more of an issue

However, in each category and sub category we have to work with the fact that we have accumulated financial assets which, from a fiscal point of view, will be subject to taxation in any one country or another. Knowing which group and sub group you belong to, and the definition of such, will likely determine which jurisdiction you are considered for inheritance tax/ succession purposes.

So let’s focus on the subject of domicile for a moment, since the application of domicile will determine which tax authority will have overriding power when it comes to your inheritance tax or successione. Firstly I want to highlight the definition of domicile in the UK (which may also be applied in other similar countries which work on a basis of common law)

Definition of domicile
The domicile is the country which a person officially has as their permanent home, or has a substantial connection with. When you’re born, you’re automatically assigned to the same domicile as your parents, which is defined as your domicile of origin. If your parents were not married, typically your domicile of origin will be the same as your mother, although this may vary depending on each individual’s circumstances.

Your domicile of origin then continues until you acquire a new domicile – even if you move abroad, unless you take specific action, it is unlikely that your domicile will change.

Now let’s look at the definition of domicile in Italian law, which has a totally different meaning:

The place of domicile is taken to be an individual’s principal place of business and interests.

(see full definition of residency and domicile in Italy HERE)

As you can see the two definitions have quite a different meaning. This creates problems when looking at inheritance tax, succession planning and will writing.

CAN I BREAK DOMICILE OF ORIGIN?
For those of you who fit into the category of having lived in Italy for many years and have few or no connections back in your country of origin, it might be that you are now in the position that you could break the domicile of origin and be subject to the law of Italy on your worldwide estate. This might have some advantages given that succession taxes in Italy are very low compared to other European countries.

However, to break the domicile of origin rule, specifically when relating to UK citizens, you would have to:

show that you were not domiciled in the UK within the three years before death
show that you were not resident in the UK in at least 17 of the 20 income tax years of assessment ending with the year in which you died

CHANGING YOUR DOMICILE
You might also try and actively change your domicile but to do this you will need to satisfy a number of criteria and be able to provide evidence of each one. The basic criteria for changing your domicile will typically include as an absolute minimum:

* Leaving the country in which you are domiciled and settle in another country
* Provide strong evidence that you intend to live in your new location permanently or indefinitely.

However, the criteria for changing your domicile are incredibly varied and include things like closing bank accounts down in your country of origin, selling all properties that you may own there and finally each case will be judged on it’s merit incorporating the evidence provided.

SO WHAT IS THE SOLUTION IN ITALY?
The long and short of this is that when you die, it is highly likely that as a foreign national living in Italy, that unless you have attained cittadinanza, the Italian authorities will refer back to your country of origin and allow that authority to apply their inheritance tax code to your worldwide assets. (Any Italian taxes would still need to be applied, where appropriate to Italian domestic assets, such as property) Whilst this might be preferable for some, you may wish the Italian tax code to apply on death because of its lower tax rates. If this is the case then you have to try and break domicile and this can only be determined at the point of death by the relevant tax authorities. If you want to know how hard that could be then see the ”famous example’ in the column opposite.

Clearly it makes sense to start planning to minimise problems from an inheritance tax point of view, as soon as possible. Having a will in place is the first step to ensuring that your relatives are not left with cross border legal burden when the inevitable happens.

Currency Fluctuations

By Gareth Horsfall
This article is published on: 17th October 2017

This week I want to dedicate my Ezine to the currency of living abroad.

How many people do you know in your home town or in your home country that worry about currency fluctuations? Have you ever heard anyone worry about the EUR v GBP or EUR v USD level at any one time? Maybe they look once a year when they are going on holiday and leave the post office with a smile on their face or have a sullen expression depending on the exchange rate. But for the rest of the year?

It’s not so simple for the life of the straniera/o!

Almost everyone I know is concerned to some extent about the exchange rate. Whether it is someone who is building a house and watches the exchange rate drop (you know who you are!) or people living on fixed pension incomes. I also include myself in the exchange rate trap since part of my earnings are in GBP. I understand your pain.

Of course, these are the simple aspects of currency re/devaluation and to some extent we can budget and plan for its eventuality and prepare ourselves. But what about when multiple currencies are at play in our investment portfolios. There it can create even more unusual effects.

The following comments (slightly modified by myself for easier understanding) come from Robert Walker at Rathbones Asset managers who wrote a piece about the interplay of currencies in a managed portfolio of assets. I thought it might interest you.

CURRENCIES AT WORK
With a portfolio approach that is global in nature, currency volatility is playing an important role in the reported returns to clients on a quarter-by-quarter basis. The last two years have seen substantial US dollar, British Pound and Euro volatility as confidence in the respective economic regions ebbs and flows. This has a profound effect on how the overseas assets’ performance are reported in the investor’s base currency, based on their individual circumstances.

US DOLLAR
The US dollar has been a safe haven in times of increased economic uncertainty. In the first few months of Donald Trump’s presidency, the US dollar strengthened on the presumption that tax cuts would stimulate the economy. This has subsequently reversed, as the realisation of many false or premature promises has taken hold.

BRITISH POUND
The British pound has seen its value fall significantly against the US dollar and euro due to Brexit uncertainty. Until the exact path of Brexit and the economic ramifications of this are known, it is likely that the pound will remain weak. There will be many twists and turns along the way until March 2019, not least with the Conservative’s General Election result and subsequent reliance on the Democratic Unionist Party. The current status quo is very vulnerable to further turmoil and the weakness of sterling is a by-product of this.

EURO
At the turn of 2017, markets were focussing on the possibility of anti-establishment vote in both The Netherlands and France. At the time, both countries had parties with anti-European Union policies in opinion poll ascendency and thus the consensus was to remain underweight in the Eurozone. Since that time, the euro has undergone a substantial recovery of over 14% against the US dollar as political risk subsided and economic confidence in the Eurozone improved. Against sterling, it is up over 7% this year in addition to the weakness after Brexit of 2016. Both of these currency movements have had the impact of weakening the value of US and UK assets for euro investors.

THE INTERPLAY OF CURRENCIES
Performance of globally diversified portfolios has been affected by each of these currency movements. For example, had a US investor bought euro assets at the start of 2017 the translated value would be increased by 14% due to the currency effect alone, but a euro investor who bought US assets at the start of the year would be seeing a translated loss of over 12%. Investors in sterling will have seen the value of overseas assets increase markedly during the Brexit process as the pound has weakened significantly, but euro investors with sterling exposure have seen a corresponding fall.

Over the long-term, we would expect the impact of shorter term currency movements to average out. For the pound particularly. (See comments about the Pound in the right hand column).

When managing portfolios in euros, sterling and US dollars, we ordinarily have a degree of country of residence bias to a client’s base currency. However, this is dependent on a client’s unique circumstances. Our portfolios are globally diversified, where we are trying to gain exposure to a portfolio of high-quality global assets in order to reduce risk to any one particular economic region. Indeed, currency analysis can be somewhat circular, as the underlying investments in each region are typically multi-nationals that have a global spread of currencies. This can mean that an individual portfolio may deviate against a certain measure or benchmark over the short-term, but which is most likely a temporary effect, but we feel that the spread of global investments will reward clients well over time, rather than focusing on fast changing and unpredictable currency movements.

HEDGING
Almost all investment professionals admit that forecasting future direction of currencies is a thankless task, as currencies are largely influenced by future unknown events which are, by definition, unpredictable.

As with most investments, volatility can also be driven by speculative investors such as hedge funds. Hedging currency risk, i.e. eliminating the currency impact on returns and focussing on the underlying return, is sometimes considered by investors. This can add to certainty but also more cost. In many cases, due to the inherent unpredictability of currency markets, hedging not only detracts from returns, due to the increased costs, but often proves to be the wrong action in hindsight.

If you want to review your portfolio returns over the last year/s with an eye on the impact of currency fluctuations and how this might affect your income and expected returns then you can contact me on gareth.horsfall@spectrum-ifa.com or call me on 3336492356

How to be compliant…..

By Gareth Horsfall
This article is published on: 3rd October 2017

03.10.17

What an interesting couple of weeks. Organising a protest in Firenze to fight for the protection of citizens’ rights in the EU, to being interviewed across multiple news channels around the world and being joined by about 100 people who turned up on the day and got an equal amount of press attention. And now, to slip back into normal life again and a work/life pattern. It all seems a little surreal.

But whilst the amazing memories are still clear in my mind, the ever present obligations of financial life continue and in this article I am going to elaborate on one which is an extremely useful financial planning tool in Italy.

I haven’t written about the benefits of the Italian compliant Investment Bond for some time and the details have moved on a little since my last musings on this topic. In this article I just want to take a look at the Investment Bond contract, the things that make it compliant for Italian tax purposes and why they can help with long term tax planning in Italy.

WHAT IS AN INVESTMENT BOND?
In short, an Investment Bond is a life assurance contract, but the life assurance part is stripped to a minimum and your money is allocated exclusively to investments. Its other name is an Investment Bond. The life assurance part is normally offered by a company as an additional 1% of the value paid out by the company on death or a minimum protection of the original investment, determined by you. Under these terms the contract qualifies as an Investment Bond and therefore is treated preferentially for tax in Italy.

Typically these companies are based in Dublin, Ireland, and due to its place in Europe and standing as a financial centre, can design products exclusively for different EU markets. In this way the money is not located in Italy but complies with local laws.

WHAT IS THE TAX TREATMENT?
Any invested monies, whilst held in an Italian compliant Investment Bond will NOT be immediately liable to capital gains tax or income tax on distributions/dividends etc.

This means that for the larger portfolios, where active management of a portfolio is taking place, the money can be moved around and invested in any way possible without incurring an immediate tax liability. Administratively, this has huge advantages as each taxable event (income or gains) do NOT have to be reported and taxed in the year in which they occur, and neither does the arduous task of calculating everything, pro rata, from the UK tax year to the Italian tax year or vice versa, for example, and/or converting all those events to EUR from other currencies on the day in which they occurred at the official Banca D’Italia EUR exchange rate. A large task even for the more monetary minded.

The monies are only taxed when a withdrawal is made and ONLY on the capital gain element of the withdrawal, not the whole amount.

This can be a highly effective tax planning tool for those seeking growth and/or income from investments. It can literally mean an income stream with very little liability to tax in the early years.

COMPLIANCY IN RECENT YEARS
In recent years the Italian authorities have been looking into the higher value arrangements that qualify under the definition of Polizza Assicurativa Unit Linked / Investment Bond to ensure that they comply. If not, tax penalties and redefinitions of the policies can arise (more on that below).

The more recent developments are as follows:
1. The policy must have the opportunity to insure a certain level of the principal investment. (But this option does not necessarily have to be taken up).

The theory here is that these vehicles are clearly being used for investment purposes as the main driver and the life assurance element is secondary. The Italian authorities now expect to see that the option to protect a specified amount of the investment, on death, is included in the policy, rather than just the historic additional 1% paid out on death.

2. ‘Self investment’ and ‘advised’ investment options are NOT unlimited.

In the past it has typically been the case that you could invest in any traded investment funds in the world. However, the Italian authorities started to look at this more closely, and rightly in my opinion.

Their argument is that monies in an Investment Bond should be invested in the ‘approved funds’ of the company OR the money should be managed by a professional asset manager (our preferred partners are Rathbones, Tilney Investment group and Prudential). In this way the investor, you and I, are at arm’s length from the investment decisions. That is, it should not be managed exclusively by ourselves when the money is in the hands of the Assurance company. In reality, the investor has quite a lot of power to restrict and allow investment decisions, but they must be within the parameters laid down above.

And lastly on this point, the ability for rogue advisers to recommend investing in offshore registered funds, unregulated investments or merely investments that pay the adviser extra commissions for finding more subscribers, are much more restricted with the Italian authority decision. This has to be viewed as a good thing, in my opinion.

3. One size does not fit all

The last point is one that affects many British holders of these investment vehicles where they may have been advised to take out an investment because an adviser in the UK, for example, recognises the tax effectiveness of the assurance structure but does not understand the details required for full compliancy under each EU member state.

The typical type of policy issued under these terms is one which is located in the Isle of Man, Luxembourg, or Switzerland. A lot of these contracts, although generically correct in structure, lack the detail for it to fully comply with the requirements for an Italian Investment Bond.

If you are a holder of a contract in one of these jurisdictions, it is worth checking the terms and conditions.

WHAT HAPPENS IF MINE DOESN’T MEET THE CRITERIA?
Of course, the big question is what happens if you own or are thinking of starting an investment contract of this type without the necessary conditions mentioned above.

In recent years there have been some notable cases where the Italian authorities have looked through the structure and ruled that the portfolio was nothing but a classical investment portfolio and that the preferential tax treatment never applied. As a result, all historical taxable liabilities; capital gains and income payments, have had to be calculated and paid immediately to the authorities.

The ruling was made on the basis of one or more of the elements mentioned above not being complied with, from too much control over investments to too little life assurance protection being offered to the client.

Therefore, it is vital, from a compliance point of view, to take a look at all our financial arrangements and more importantly to review them on a regular basis. What we may have once bought many years ago, and which complied then, may now have become obsolete and could cause tax questions later.

Reviewing existing contracts and investment arrangements has become much more important with the open border tax sharing arrangement, the Common Reporting Standard’ which has now been fully implemented.

It might just be the right time to start looking at your existing arrangements to ensure they comply before anyone starts looking.

If you hold assets directly or through historic contracts of this type and would like to review them, you can contact me below or call me on +39 333 6492356.