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.