Income tax rates in Italy 2025

Now, let’s be honest, I don’t think this is going to affect many of us in any significant way, however, it might mean some savings here and there. So not to be sniffed at!!

But, you might ask why they don’t amend the first income tax bracket to make it more attractive to lower earners?

From submitted tax returns completed in 2023 we learn that 40% of 42 million taxpayers declare less than €15000 per annum in Italy and 70% of all taxpayers pay less than 20% in tax (after deductions). In 2023, the declared average income from calendar year 2022 was €22806. So given the majority of Italy’s income tax take comes from the bottom income tax bracket, it is unlikely that they will start tweaking with that any time soon, in my opinion.

However, all will be revealed in the ‘Legge di Bilancio‘ (Budget) in Jan 2025, as usual!

Inheritance Tax Overhaul
The UK inheritance tax system has always been determined by a UK person’s domicile. This always meant that the UK could wield the right to tax the estate of a UK national, even where they may have lived abroad for many years.

The classic tale regarding this situation is the story about the actor Richard Burton. I have told this story before on my E-zine, but the story goes that he was born in Wales (UK) but got into the movies and became very famous and moved to the USA, earned his money there and transferred his whole life to the US owning no more assets in the UK. On his death the UK, under the domicile rules, reserve the right to tax the estate where there are significant ties back to the UK. In Richard Burton’s case he ‘supposedly’ (I have never researched whether this is true or not, but it’s a good story anyway), wrote in his last will and testament that he wished to be buried in the Welsh cemetery where he grew up. Apparently, this was considered a sufficient tie back to the UK and the UK HMRC taxed his entire worldwide estate. I am not sure if this story is true but it does go to demonstrate the lengths to which the domicile system can come knocking, should the UK tax authorities wish to do so.

However, the talk on the street is that from October 30th the UK will move to a residency based test for inheritance tax purposes. So what does this mean?

In brief, the proposal is to allow any UK national who has lived away from the UK for more than 10 years to be able to have their estate taxed in their country of residence at the time of death (but with the UK government reserving the right to tax the state for a further 10 years should they wish to do so). This presents a HUGE financial planning opportunity for residents of Italy, as I shall discuss below.

If your intention is to live and die in Italy then Italian IHT rates are so low that it could be classed as a fiscal paradise for inheritance tax purposes. I won’t go into details, but just to say that direct line descendants (spouse and kids) all get a €1million allowance before they would pay tax at just 4%. Compared to the UK’s 40% on estate value over £325,000 (plus the possibility of main residence relief), the Italian system is much more attractive.

However, if you have invested assets (not real estate!) which you would like to protect from inheritance tax altogether, then you can potentially invest in an Italian polizza assicurativa (Investment Bond) which protects all assets within it from any inheritance in Italy, so effectively reducing your IHT bill to zero.

What a planning opportunity

I am not sure the UK government had this little tax opportunity in mind when thinking about the change but for UK nationals who are long term residents in Italy and who want to live out the rest of their lives here, this represents a great financial planning opportunity.

And here come the negatives:

Capital Gains Tax increase
For anyone holding onto UK property assets and thinking of selling them you may want to watch carefully what happens with capital gains tax rates in the UK post 30th October 2024.They are expected to be increased; currently at 18% and 24% for residential property, they are likely to increase and the change be effective immediately!

Remember that as a non-UK resident UK property owner, if you sell the property then you are subject to UK CGT on the proceeds. If you have owned the property before 2015 (when the law came into effect) then the cost (purchase) basis for your property is 6th April 2015. If purchased after then the purchase value in the contract is the cost basis for capital gains tax purposes.

If you have owned the property/ies for more than 5 years then Italy will not deem them speculative and will not tax you on them.

Here we are faced with a clear financial planning necessity because if you are invested in tax efficient vehicles (ISA’s) in the UK then it would make sense to cash them in and pay no capital gains tax on them in the UK whilst still a UK resident, and then leave them in cash (no capital gains tax on cash!) whilst you transition over to your new residency in Italy and reinvest from there. However, if a tax is levied on capital rather than assets then it may not be avoided. How the UK HMRC will do this is anyone’s guess but should this be introduced then financial planning before the move for UK resident individuals will be very important.

The bigger question is what they might do with already non-UK resident individuals who have assets still situated in the UK? Tax on transfers overseas?

Whatever law is likely to be announced will probably come into effect from April 6th 2025, so there may be time to plan, but it might be time to look at how to remove some or all of your assets (depending on your circumstances) from the UK and potentially avoiding any exit taxes.

I would repeat that this has come as a bit of a shock, but does not surprise me given the UK’s current economic difficulties. Putting in measures to avoid flight of capital overseas would not surprise me and has been bounded about as an idea in the past by a Conservative government. Will Labour finally follow through with these more draconian measures? We will soon find out.

Surcharge for non-resident buyers of UK property.
Here we have a tax increase for anyone who may be non-UK resident at the time of buying UK property. The surcharge may increase from 2% to 3%.

At the moment we don’t know any specifics and so I can only relay that which I have heard on 2 different tax seminars specifically on this topic. Some of these proposals may rightly cause some level of immediate concern and others maybe there is the opportunity to wait. At this point, if I hear anything else I will report on it straight away but I imagine that the next time will be Budget day itself.

If you would like to discuss these or any other tax or financial planning related issues in Italy then please don’t hesitate to contact me on gareth.horsfall@spectrum-ifa.com or call / message on +39 3336492356

Always happy to help where I can!