Viewing posts categorised under: Tax

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.

Tax in Spain can be a matter of opinion

By John Hayward
This article is published on: 17th April 2018

17.04.18

In Spain, there can be a huge difference in what autonomous regions charge for income, capital gains, wealth, and inheritance/succession taxes. Rules generally come from central government in Madrid but how that comes out in the fiscal wash in each region can vary considerably. For the purpose of future articles, my focus will be on the Valencian Community incorporating Castellón, Valencia, and Alicante.

There is also an unwritten rule which seems to be rife. The law of opinion. On a subject that you would think there should be clear instruction from the Spanish tax authorities, there is a lot of ignorance on several tax matters and so the law of opinion kicks in. This is especially true for any products which are based, or have been arranged, outside Spain. With the threat of fines for not declaring assets and paying taxes correctly, it seems at least slightly unjust that there is not clear instruction on how different assets are treated for tax.

As my colleague Chris Burke from Barcelona recently wrote, lump sums from pension funds can have special tax treatment, both in the UK and Spain. However, even though most people and their dog know that there is a 25% tax free lump sum in the UK, not everyone is aware that this lump sum is potentially taxable in Spain. Also, it is not common knowledge that there is a 40% discount on qualifying pension lump sums. It is likely that many people have overpaid taxes due to no or bad advice.

Can you tell the difference between margarine and a Section 32 Buyout?
If you can, you could be leader of the Conservative Party, according to the script of The Last Goon Show of All (Actually the comparison was between margarine and a lump on the head but the qualification would seem equally apt almost 50 years later). It is frightening what little knowledge there is with regard to pension schemes, notably with the advisers who make money for arranging them! A Section 32 Buyout plan is just one of many types of pension scheme which have emerged over the last 30 to 40 years. Few people are familiar with all the different types.

A pension fund is, in many cases, the second largest asset behind a property. People are generally familiar with the property expressions such as “doors”, “windows”, “walls”, “kitchen”, etc. They know where these things need to go and when they need repair and maintenance. When it comes to pensions, it is a different story. In a way, that is great for us because it means people need advice. The problem comes when they leave themselves open to advice which is inaccurate, if not complete garbage.

People need to check the qualifications of an adviser and their firm before exposing themselves to potential problems. I have the Chartered Insurance Institute G60 Pensions qualification. You won´t find too many advisers with this, especially not in Spain. As a company we have a team which is qualified and which keeps up to date with pension rules in the UK and Europe. All enquiries go through them before anything is arranged which should give comfort to those nervous about what will happen to their pension funds.

UK Investments & ISAs – Tax Treatment in Spain

By Chris Burke
This article is published on: 16th April 2018

16.04.18

With automatic exchange of financial information between most countries now standard practice, most of us already recognise the importance of declaring our assets properly and fully. In the UK, if your accountant or tax adviser declares your assets incorrectly, they are liable; however, that is NOT the case in Spain. I have been contacted by many people with various stories of how their accountants in Spain have reported assets. Sometimes it feels like people are speaking to numerous accountants until they find the one with the answer they want – if the declaration is incorrect though, and leads to an investigation, you are personally liable. Therefore, it is essential to have your assets reported correctly.

It is quite straightforward to understand the Spanish tax treatment of your UK assets. If they are NOT Spanish compliant – that is to say, not EU based and regulated AND the company holding these assets doesn’t have a fiscal representative and authorisation in Spain – then income and investment growth are taxable annually. Note that investment growth on assets such as shares, ISAs and premium bonds is taxable regardless of whether you have taken any income or withdrawals.

Below you will see the main list of investments that need to be declared and the tax rates that apply annually:

Type of Assets/Investment	Tax Payable	Type of Tax
Investment funds/stocks/shares	Yes, on growth	Capital Gains Tax (19-23%)
ISAs	Yes, on growth	Capital Gains Tax (19-23%)
Premium Bonds	Yes, on gain/win	Income Tax (19-45%)
Interest from Banks	Yes, on growth	Capital Gains Tax (19-23%)
Rental Income	Yes	Income Tax (19-45%)
Pension Income	Yes	Income Tax (19-45%)

Expenses may be able to offset some of the tax on gains, and for long term property rentals you can receive up to 60% discount on net rental income. However, tax reliefs and allowances that applied in the UK are not available to you in Spain.

There are ways of reducing these taxes, by having your finances organised correctly, and in many cases there is also scope to defer tax. This means there is no tax to pay if you are not taking an income or withdrawals from your investment. In fact, the more your money grows, the greater the potential tax saving.

The first thing you should do, and any financial adviser or tax adviser should do, is consider ways of mitigating your tax, both now and in the future. Otherwise you could end up with a ‘leaking bucket’. Many accountants are starting to increase charges for declaring UK assets, which need to be listed individually and where there is often lack of familiarity with the assets held. By the time you have paid the tax for NOT drawing your money, paid your accountant and lost any tax relief that applied in the UK, in most cases there are more cost effective, tax efficient, Spanish compliant options available. Furthermore, for those returning to the UK, there is still generous tax relief which applies to certain Spanish compliant investments.

For an initial discussion regarding your finances and practical guidance on planning opportunities, please get in touch – my advice and recommendations are provided free of charge without obligation – chris.burke@spectrum-ifa.com

Tax and Savings in Spain

By Barry Davys
This article is published on: 28th March 2018

28.03.18

This is an introduction to the differences between the UK and Spanish tax systems and an introduction to a European ISA equivalent. It has been produced to help answer two regularly asked questions. : “What is the difference in taxation between Spain and in the UK?” – followed by “Is there a tax free savings account in Spain similar to an ISA?”.

For those of you not from the UK, I hope that the Spanish part of the table below will still be useful in allowing you to compare it with your home country tax situation.

Tax	UK	Spain
Tax Year Dates	6th April – 5th April	1st January – 31st December
Income Tax Allowance	£11,500	€9250 up to age 64 €10,400 age 65+ €11,800 age 75+
Capital Gains Tax Allowance	£11,300	N/A but some gains can be offset against some losses
Savings Tax Rates (interest and capital gains)	N/A Income Tax and CGT calculated separately	19% to €6,000, then 21% for the next €44,000 and 23% above €50,000
Tax Free Interest	£1,000	Nil
Tax Free Dividends	£5,000 Falling to £2,000 in 2018/19	Nil
Annual ISA Allowance	£20,000	Unlimited (see Euro ISA below)
Pension Contributions Limits	100% of your earnings up to £40,000 pa	€8,000 pa
Inheritance Tax	Above £325,000 at 40% plus possible allowance against main residence of £125,000 in 2018/19	Autonomous community rules. Catalonia and Madrid have large discounts for immediate family
Wealth Tax Limit	N/A at present	Autonomous community rules. Catalonia: over €500,000 with a €300,000 allowance for main residence, rates from 0.21% to 2.75%

The main differences are in Wealth Tax, Inheritance Tax and the way savings are taxed.

Wealth Tax in Spain

In the UK there is not currently any Wealth Tax. There is in Spain and the rates and method of calculation are set by the autonomous communities. In Catalunya the rate is banded, starting at 0.21% and rising to 2.75%.

Inheritance Tax in Spain

In the UK, the estate of the deceased person is taxed as a whole, whilst in Spain, the person receiving the bequest is taxed based just on the amount they personally receive from the estate. The allowances and method of taxation also differ. The rates of inheritance tax in Barcelona and the Costa Brava are the same but will be very different if you live in Andalucia. For more information, please see Inheritance Tax in Catalunya as an example.

However, if you prefer to speak with an experienced adviser who lives in Catalunya please click ‘Inheritance tax help‘

Tax Free Savings in Spain

In the UK, since January 1987 with the introduction of Personal Equity Plans (PEPS), we have been used to having tax free savings. Peps are now called ISAs and the allowance is now £20,000 per annum. If you live in Spain and have an ISA please note it is taxable in Spain. The fact that it is tax free in the UK does not transfer to Spain and you should look at the alternative below.

Spain does not have an ISA system as such but there is a similar investment, sometimes known as the “European ISA”. It is tax free whilst invested and has a very beneficial low taxation basis, especially if you require income from your investment. It is a little more restrictive than the UK ISA but is still worthwhile.

The two big advantages are that there is no limit and it is portable to other countries. If you would like to invest 10,000,000 euros in one year in the “European ISA” you can do! Unlike a UK ISA, the European ISA can go with you if you move country (not to all countries). If you return to the UK, the tax will be proportional to the amount of time you have been in the UK against the time you have had the European ISA. So if you have a Euro ISA for 10 years in total and have moved back to the UK for the last two years of the 10 years, the tax will be reduced. Specifically, the tax will be calculated and multiplied by 2/10ths. An 80% tax saving!

*Sources: https://www.gov.uk/government/organisations/hm-revenue-customs
http://www.agenciatributaria.es/

If you would like more information on Inheritance Tax, Wealth Tax or the European ISA, please contact me on barry.davys@spectrum-ifa.com or telephone on +34 645 257 525. If you have UK ISAs, I will also be happy to advise you on how to make these tax efficient in Spain.

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

French Tax Changes for 2018

By Sue Regan
This article is published on: 9th March 2018

09.03.18

In my last article from early November 2017 I set out the proposed French tax changes for 2018. After some fine-tuning of the proposals the actual changes came into effect from 1 January this year, the most noticeable of which were the introduction of the Flat tax on revenue from capital, and the replacement of the Wealth tax (Impôt de Solidarité sur la Fortune, or ISF) previously levied on total assets, with the new Impôt sur la Fortune Immobilier (IFI). You can read a summary of these and other changes by accessing the following link on our website: French Tax Changes

So, at the time of writing, with “the Beast from the East” sweeping its way across most of Europe last week, you would be forgiven for thinking we are still in the depths of winter rather than into the first month of spring. Spring is my favourite time of year. With any luck things will settle down to normality very soon and we will be enjoying the longer, warmer days with the spring flowers in abundance and the sense of anticipation that summer is just around the corner.

BUT… (of course, there has to be a BUT) along with spring come the, oh so loved, blue and pink Tax Return forms that will be arriving in our post boxes very soon. Over the last couple of years my Spectrum colleagues and I have been writing about the existence of the Common Reporting Standards (CRS) that are now well and truly in operation, whereby financial institutions of the EU and many non-EU countries around the world are exchanging financial information in order to combat tax evasion. If you have been receiving letters from your bank or investment providers asking for your country of residence and Tax Identification Number (TIN) – this is why.

Thus, if you are French resident, it is very important that you declare the existence of all bank accounts, assurance vie policies and any other income generating investments held outside of France, even if you do not draw on the income. Failure to do so can result in severe penalties – €1,500 for each undisclosed bank account or policy (which increases to €10,000 if this is held in an uncooperative State that has not concluded an agreement with France to provide administrative assistance to exchange tax information). Furthermore, if the total value of the bank accounts and policies not declared is at least €50,000, then the fine for each is increased to 5% of the value of the account or policy if greater than €1,500 (€10,000 if in an uncooperative State).

You can make the declaration by listing the information on plain paper and attaching it to your Tax Return. Even bank accounts with a nil balance should be reported. In addition, if you have closed any foreign bank accounts during 2017, the accounts should be reported and the date of closure mentioned.

Unless you will be submitting a Tax Return for the first time (in which case you must complete a paper return) you are required to submit on-line in 2018 if your net taxable income (revenu fiscal de référence) in 2016 was greater than €15,000. However, you are granted an exemption from this requirement if you do not have an internet connection at your home. There are plans for paper based declarations to be completely obsolete by next year.

If you need to complete the pink form for anything other than pension, then perhaps you may be paying unnecessary taxes and therefore might benefit from a review of your financial situation. So don’t wait until May to gather all the information together, make a start now and get organised so that any action needed can be identified and taken care of before the “silly summer season” is upon us – it’ll be here before you know it!

French Tax Changes 2018

By Spectrum IFA
This article is published on: 23rd January 2018

During December, the French budget completed its Parliamentary process, with little change to the initial proposals. Shown below is a summary of our understanding of the principle changes.

INCOME TAX (Impôt sur le Revenu)
Income tax bands of the barème scale have been increased as follows:

Income	Tax Rate
Up to €9,807	0%
€9,808 to €27,086	14%
€27,087 to €72,617	30%
€72,618 to €153,753	41%
€153,784 and over	45%

The above apply in 2018 in respect of the taxation of 2017 income, for example, pensions and earnings.

SOCIAL CHARGES (Prélèvements Sociaux)
The Contribution Sociale Généralisée (CSG) has been increased by 1.7%. This results in investment income and property rental income (unless exempted by a Double Taxation Treaty), being liable to total social charges of 17.2%. In addition, where France is responsible for the cost of the taxpayer’s healthcare in France, social charges at a rate of 9.1% will be applied on pension income.

FLAT TAX on revenue from capital
The Prélèvement Forfaitaire Unique (PFU) – also known as the Flat Tax – has been introduced. This will be charged on the total amount of interest, dividends and capital gains from the sales of shares, received by the taxpayer. It also applies to certain gains in withdrawals from assurance vie contracts and this is covered in more detail in the following section.

The Flat Tax rate is 30%, made up as follows:
➢ a fixed rate of income tax of 12.8%; plus
➢ social charges at the rate of 17.2%.

However, the option to pay income tax at the progressive barème scale tax rates above (in lieu of the Flat Tax rate of 12.8%), plus social charges of 17.2%, is still possible, but only at the taxpayer’s specific request. In this case, the taxpayer will also benefit from the existing 40% abatement on dividends (but not for social charges).

Capital gains from the sale of shares, no longer benefit from taper relief, where the gain is taxed at the Flat Tax rate.

However, for shares purchased before 2018, where the taxpayer elects for realised gains to be taxed at the progressive barème rates, taper relief will continue to apply, as follows:
➢ 50% for a holding period from two years to less than eight years; and
➢ 65% for a holding period of at least eight years.

This relief also applies to gains arising from the sale of shares in ‘collective investments’, for example, investment funds and unit trusts, providing that at least 75% of the fund is invested in shares of companies.

Likewise, for investments made prior to 2018 in new small and medium enterprises, the higher allowances against capital gains for investments in such companies are also still provided, as follows:
➢ 50% for a holding period from one year to less than four years;
➢ 65% for a holding period from four years to less than eight years; and
➢ 85% for a holding period of at least eight years.

Similarly, the Contribution Sociale Généralisée (CSG) deductible portion (6.8% out of the total social charges of 17.2%) will only be permitted in the case of taxation at the progressive barème scale rates.

Taxpayers will not be able to selectively chose the income that is subject to the Flat Tax and that which is subject to the progressive rates of the barème scale. The default is the Flat Tax and where the taxpayer makes an election for any income from capital to be taxed at progressive rates, this will apply globally. Therefore, careful planning will be needed by some taxpayers, particularly if they intend to make a disposal of a large holding of shares and/or receive a large payment of dividends.
The Livret A, Livret Développement Durable and Livret Épargne Populaire accounts remain exempt from income tax and social charges.

ASSURANCE VIE & CAPITALISATION CONTRACTS
Premiums paid before 27th September 2017
For premiums paid before 27th September 2017, there is no change. Therefore, the taxpayer has the option to be taxed at the progressive rates of the barème scale or the Prélèvement Forfaitaire Libératoire (PFL) rates, as follows:
➢ during the first 4 years at 35%
➢ between 4 years and 8 years at 15%
➢ post 8 years at 7.5%

Social charges at the rate of 17.2% are payable in addition.

For contracts with a duration of at least 8 years, the abatement of €4,600 for a single person, or €9,200 for a couple, continues to apply.

Premiums paid from 27th September 2017
For premiums paid from 27th September 2017, the taxation rate will vary according to the age of the contract, plus for contracts older than 8 years, according to the ‘threshold’ amount of capital remaining in the contract as at 31st December of the year prior to the withdrawal being taken.

The threshold amount is €150,000 per individual person (across all assurance vie policies), which is determined by reference to the amount of the premiums invested, reduced by any capital already withdrawn, and not the value of the contract.

The threshold is not cumulative between persons and therefore, couples who are taxed as a household cannot share in each other’s threshold. Thus, one spouse may reach the threshold level, whilst the other does not, for example, where one has say €200,000 capital invested and the other only has €80,000 invested.

The reform provides for the PFU to apply for assurance vie contracts of less than 8 years, regardless of the amount of the outstanding capital. Thus, the PFU rate of 30% will be globally substituted for the pre-27th September 2017 rates of 52.2% (up to 4 years contract duration) and 32.2% (4 – 8 years contract duration)

Therefore, according to the age of the contract, the following tax rates will apply:
➢ during the first 8 years, the Flat Tax rate of 12.8%
➢ over 8 years, 7.5% up to the threshold, plus 12.8% above the threshold.

Social charges of 17.2% are payable in addition.
Insurers will be obliged to deduct the tax of 12.8%/7.5%, i.e. depending on the duration of the contract, plus the social charges. Subsequently, for contracts older than 8 years and where the taxpayer has exceeded the threshold, any additional tax due will be charged through the taxpayer’s annual declaration.

The following table summarises the situation:

	Fixed tax rate applied
Gaines from premiums paid from 27/09/2017	Deducted by the insurance company plus social charges of 17.2%	Additional tax payable if threshold exceeded	Additional tax payable if threshold not exceeded
Contracts < 8 years	12.8%	No	No
Contracts > 8 years	7.5%	Yes, to reach 12.8%	No

The post 8-year abatement of €4,600 for a single taxpayer, or €9,200 for a couple, continues to apply.

All taxpayers will have the possibility to opt for taxation at the progressive income tax rates of the barème scale, plus social charges, at the time of making their tax declaration. As the insurance company would have already deducted the PFU tax, any excess tax already paid will be refunded following the processing of the tax declaration made in the year following the payment of the withdrawal. However, taxpayers should be aware that if taxation at the progressive rates of the barème scale is chosen for assurance vie gains in amount withdrawn, then this will apply globally to all income from financial capital.

There is no change to the inheritance tax treatment of assurance vie contracts.

Examples of how the taxation will work:

Example 1
Mr X invested €200,000 in his policy in January 2017. In case of redemption after 8 years, as the premium was invested before 27th September 2017, the gain will be taxed at 7.5%, after application of the abatement of €4,600. Social charges of 17.2% on the total gain are also payable.

Example 2
Mr Y invests €200,000 in his policy in October 2017. In case of redemption after 8 years, as the premium was invested after 27th September 2017 and exceeds the threshold of €150,000, 75% of the gain will be taxed at 7.5% and 25% at 12.8%. The abatement of €4,600 will be first applied to the gain taxed at 7.5% and any balance applied to the gain taxed at 12.8%. Social charges of 17.2% on the total gain are also payable.

Example 3
Mr Z invests €100,000 in an assurance vie contract in 2007 and makes an additional investment of €200,000 in 2018. He decides to fully surrender the assurance vie in 2019, when the value of the policy is €360,000. €50,000 of the gain is attributed to the 2007 premium and €10,000 to the premium invested in 2018. Our understanding is that the tax on the total gain of €60,000 would be calculated as follows:

– 2007 premium: (€50,000 – €4,600) x 7.5% = €3,405.00
– 2018 premium: as he has only ‘used’ €100,000 of the €150,000 threshold against the 2007 premium, the balance of €50,000 can be applied to the premium paid after 27th September 2017, which is 25% of the €200,000 invested. Therefore, 25% of the gain of €10,000 relating to the 2018 premium will be taxed at 7.5% and the balance at 12.8%, as follows:

o (€10,000 x 25%) x 7.5% = €187.50
o (€10,000 x 75%) x 12.8% = 960.00

– Total tax = €3,405.00 + €187.50 + €960.00 = €4,552.50

Social charges of 17.2% on the total gain are also payable.

PROPERTY WEALTH TAX (Impôt sur la Fortune Immobilier)
Wealth tax on total assets (Impôt de Solidarité sur la Fortune – ISF) has been abolished and replaced with Impôt sur la Fortune Immobilier (IFI).

IFI will apply only to real estate assets and the principal residence is still eligible for the 30% abatement against its value. Therefore, taxpayers with net property assets of at least €1.3 million would be subject to IFI on taxable assets exceeding €800,000, as follows:

Fraction of Taxable Assets	Tax Rate
Up to €800,000	0%
€800,001 to €1,300,000	0.50%
€1,300,001 to €2,570,000	0.70%
€2,570,001 to €5,000,000	1%
€5,000,001 to €10,000,000	1.25%
Greater than €10,000,000	1.50%

However, at the outset of the debates on the proposed tax changes, it quickly became clear that MPs were not entirely happy about the idea of replacing ISF with IFI. In particular, for people with substantial wealth, who would also benefit from the Flat Tax, this was considered to be a step too far! Therefore, additional taxes have been introduced on certain luxury goods, for example, yachts and sports cars.

TAXE d’HABITATION
Taxpayers who are not liable to IFI will benefit from reductions in taxe d’habitation, in respect of their principal residence, subject to certain taxable income (Revenue Fiscal de Référence) ceilings not being exceeded. For a single taxpayer, the taxable income limit is €27,000 and for a couple, €43,000.

For those who meet the requirements, their taxe d’habitation will be reduced by 30% in 2018, 65% in 2019 and total exoneration in 2020. Where taxable income is just above the income threshold (up to €28,000 for a single person and €45,000 for a couple), the reduction in the taxe d’habitation will be proportionally reduced.

ENTRY INTO LAW
The changes have entered into law following publication in the Official Journal of France.
22nd January 2018

This outline is provided for information purposes only. It does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action to mitigate the effects of any potential changes in French tax legislation.

Taper Relief on Capital Gains from the Sale of Shares

By Derek Winsland
This article is published on: 16th November 2017

16.11.17

My colleague, Sue Regan, in her last article, gave details of a number of tax changes currently being debated in Parliament and which are expected to come into force by the end of the year. On a positive note, wealth tax (Impot de Solidarite sur la Fortune) is to be abolished, to be replaced by a tax on the value of property (Impot sur la Fortune Immobilier) or IFI. This can have real benefit to those with investments outside of property.

Less positive is the intention to abolish taper relief on capital gains from the sale of shares, which includes equity investment funds. This can have serious connotations for those investors holding investment portfolios outside of an Assurance Vie. Portfolios held within equity Individual Savings Accounts (ISA’s) in the UK, for example, will be affected. For UK residents, ISA’s represent an excellent savings and investment vehicle, with ‘income’ drawn from the ISA tax free in the hands of the investor. Growth in the investment attract no capital gains tax charge, irrespective of whether the gains are extracted or allowed to roll up within the ISA.

In the hands of a French tax resident though, ISA’s don’t enjoy any of the tax benefits UK residents take for granted. It is as if the ISA wrapper doesn’t exist. Instead, in France, taper relief is granted on gains made from equities (shares) where the holding is greater than two years. Where shares have been held for two years and up to eight years, the relief is 50%; after eight years the relief rises to 65% under the current system. Crucially, this relief also applies to collective investments where a minimum of 75% is invested in equities.

If you then factor in the fact that all gains are calculated in euros, shares and equity collectives in the UK held for a long time can be further reduced because the purchase price will be converted into euros using the exchange rate on the day of purchase. Likewise, the euro value is calculated on the day of sale. With the value of sterling currently low, the amount of any gain can therefore be further reduced if the exchange rate on the day of purchase is higher than the rate on the sale date.

All of this means that if you are resident in France, holding on to stocks and shares ISA’s in the UK, it really is time you thought about cashing them in, reinvesting the proceeds in the far more tax efficient Assurance Vie. Time really is of the essence.

If you feel you could be affected by this, or have personal or financial circumstances that you feel may benefit from a financial planning review, please contact me direct on the number below. You can also contact me by email at derek.winsland@spectrum-ifa.com or call our office in Limoux to make an appointment. Alternatively, I conduct a drop-in clinic most Fridays (holidays excepting), when you can pop in to speak to me. Our office telephone number is 04 68 31 14 10.

Proposed French Tax Changes 2018

By Sue Regan
This article is published on: 25th October 2017

25.10.17

Since my last article the October Tour de Finance event has taken place at the Domaine Gayda in Brugairolles, near Limoux. As always, it was a huge success and very well attended. It was great to see some familiar faces as well as make some new contacts. Over 70 guests in all came along to listen to a number of industry experts speak about highly topical issues such as the proposed changes to the French tax system, pensions, assurance vie, discretionary fund management and, of course, the “B” word!

In this article I will concentrate on our understanding of some of the proposed changes to the French taxation regime, as published in the Projet de Loi de Finances 2018. Of particular interest to many of our clients are the proposed changes to Wealth Tax, the increase in Social Charges and the new 30% Flat Tax on revenue from capital. At the time of writing, these, and other proposed changes have still to be agreed in Parliament and then referred to the Constitutional Council for review before entering into French law. So we won’t know for sure the exact changes that will take place until the end of the year. However, below is a brief summary of the main proposals as we understand it.

WEALTH TAX (Impôt de Solidarité sur la Fortune)
The government proposes to abolish the current wealth tax system and replace this with Impôt sur la Fortune Immobilier (IFI).

IFI would apply only to real estate assets and the principal residence would still be eligible for the 30% abatement against its value. Therefore, taxpayers with net real estate assets of at least €1.3 million would be subject to IFI on taxable assets exceeding €800,000, as follows:

Fraction of Taxable Assets	Tax Rate
Up to €800,000	0%
€800,000 to €1,300,000	0.5%
€1,300,001 to €2,570,000	0.7%
€2,570,001 to €5,000,000	1%
€5,000,001 to €10,000,000	1.25%
Greater than €10,000,000	1.5%

This is good news for French residents with substantial financial assets, including those held within assurance vie. However, there have already been some protests to the scope of the new form of ‘Wealth Tax’ being levied only on real estate, with luxury items such as yachts and gold bullion being exempt. Thus, I don’t think we have heard the last of this!

SOCIAL CHARGES (Prélèvements Sociaux)
It is proposed to increase the Contribution Sociale Généralisée (CSG) by 1.7%. This will result in investment income and property rental income being liable to total social charges of 17.2% and, where France is responsible for the cost of the taxpayer’s healthcare in France, at a rate of 9.1% on pension income.

FLAT TAX on revenue from capital
It is planned to introduce a Prélèvement Forfaitaire Unique (PFU) at a single ‘flat tax’ rate of 30% on investment income, made up as follows:

➢ a fixed rate of income tax of 12.8%; plus

➢ social charges at the rate of 17.2% (taking into account the proposed increase).

The PFU will apply to interest, dividends and capital gains from the sale of shares.

How does this affect Assurance Vie contracts?
Based on information currently available and, of course, the finer details may change before being passed into law, it is our understanding that for premiums invested totalling €150,000 or less per person (so €300,000 for a joint life policy) the existing system of withholding tax (prélèvement forfaitaire libératoire PFL). Taking into account social charges at the increased rate of 17.2%, this results in gains on amounts withdrawn, continuing to be taxed, as follows:

➢ during the first 4 years at 52.2%

➢ between 4 years and 8 years at 32.2%

➢ post 8 years at 24.7%

The first draft of the bill proposed that the new ‘flat tax’ will replace the existing PFL system but will only apply to gains on premiums invested after 27 September 2017, that exceed the thresholds above. However, the National Assembly has already decided that it is illogical to have different tax rates, depending on how long the premium has been invested, for new investments made from 27 September 2017. Therefore, an amendment to the bill has already been proposed that all new investments made should be subject to the ‘flat tax’.

It is proposed that all taxpayers will have the possibility to opt for taxation at the progressive income tax rates of the barème scale, plus social charges. Therefore, any potential gains on capital, including withdrawals from assurance vie policies, should be assessed on an individual basis to determine in advance as to which method of taxation would be most appropriate.

There is no change to the inheritance tax treatment of assurance vie contracts and the post 8-year abatement of €4,600 for a single taxpayer, or €9,200 for a couple, will be maintained. Thus, despite the proposed tax changes, the assurance vie will continue to be a very useful vehicle for sheltering financial assets from unnecessary taxes. In addition, as assurance vie policies fall outside of your estate for inheritance tax purposes, you can leave your investments to your chosen beneficiaries without being subject to the French Succession Laws of “protected heirs”.

The abolition of taper relief
The reform also proposes the abolition of the taper relief on capital gains from the sale of shares, in respect of gains from disposals from 2018.

So, if you are sitting on a portfolio of shares which are not sheltered in a tax wrapper, then now is the time to have a look at any gains you may have and, possibly make use of the taper relief of up to 65% on the total gain, while it is still available. Don’t delay in speaking to your financial adviser who should be able to identify whether the restructuring of your investments is in your best interests.