In this age of mobile communications, low cost airlines, homes abroad and alternative lifestyles the scope for cross border tax planning has never been greater. Gone are the days when only the super wealthy or those in business should consider such matters!!!
Cross border tax planning can be of use where there are two systems of taxation, in this case the UK and Italy, which have different approaches to what they tax and how they tax it. For example, Italy does not tax inheritances whilst the UK does. By understanding these systems and the tax treaties between the two countries, you may be able to position yourself in order to reduce the amount of tax you pay. Where you are deemed resident is of paramount importance especially because it is possible to be resident in both countries at the same time.
I recently received a call from a new client’s UK accountants who were, amongst other things, concerned that this individual was spending too much time in Italy and as a consequence would have to pay higher taxes. Times have changed and Italy is not the high tax economy that it used to be. People with capital gains from property and substantial business investments in the UK, for example, can pay nothing/very low rates if they meet certain criteria.
Then there are business planning scenarios. Italy can be a bureaucratic quagmire but there are ways around this, especially if your business trades overseas or in the UK. A client in Tuscany who exports olive oil and ceramics to London and Dublin and used to operate as an Italian resident sole trader insists that incorporating as a UK Ltd company has made his life infinitely less complicated. But be careful; there are rules which need to be complied with although with the right advice you should be able to navigate the obstacles.
It is important to consider these issues carefully, do not necessarily expect your “commercialista” or UK accountant to be able to take advantage on your behalf. It is a pre-requisite that an advisor in these matters has a detailed knowledge of both the UK and Italian systems.
Below are a handful of illustrative examples.
These examples do not take account of the UK Pre-Budget Report October 2007 or the Italian 2008 Finance Act.
Mr. Smith has owned a property in Tuscany for a number of years. He is retired and spends more and more time in Italy.
When he bought the Tuscan house he also purchased an investment property in London.
Both properties have grown significantly in value and there are potential capital gains of £300,000.
He remains UK resident/ordinarily resident and sells both properties. He will pay tax of 40% on the gains from both properties. He will also pay tax on the gain of the Italian house in Italy but will be credited for this by the UK Inland Revenue. Give or take he will have a tax bill of £100,000, which may be reduced further by non business asset taper relief.
As for scenario A but he retains the Italian property for one more year, and then sells both properties. The Italian authorities will not tax the Italian gain but the UK authorities will, therefore the overall tax payable will be the same as for scenario A.
After careful consideration of the length of ownership of the properties Mr. Smith becomes UK Non Resident & Non Ordinarily Resident, and resident in Tuscany. He sells both properties and pays no capital gains. He can still spend up to 3 months per year in the UK. He must take care if he returns permanently to the UK.
Jim, who has a UK domicile, becomes tax resident in Italy at the same time as he starts a successful enterprise buying goods from Slovakia to sell to France. On leaving the UK he, in partnership with an offshore New Zealand company, which he owns, forms a UK Limited Liability Partnership, and at the same time he settles his interests in the partnership and company in to a New Zealand trust when there is no gain in either. All the relevant documents are signed in London at the representative offices of the New Zealand trustees. The partnership signs an administrative agreement with a UK company so it can acquire the necessary VAT number for intra-EC trade. The enterprise profits are not subject to taxes in any jurisdiction. After five years have passed the trust winds the LLP up, and Jim moves to Malta for eighteen months where he receives distributions from the New Zealand trust free of income tax because he is non-domicile in Malta, and because the income he receives was derived from outside Malta.
Mr. Brown owns a successful UK based company and he has a holiday home in Le Marche. His son deals with the day to day management of the business and he only attends important meetings. This way he now spends more time in Italy.
He takes a £350,000 dividend from the company and spends sufficient time in the UK to be considered treaty resident UK. He pays taxes on the dividends of £113,750; an effective rate of tax of 32.5% less the tax credit of £38,890.
He takes the same dividend but spends enough time in Italy to be considered treaty resident in Italy. He complies with the terms of the UK/Italy treaty for taxes and will now pay an effective rate for dividends of 15.5%, a tax bill of £44,900.
Lady Putney has lived in her villa in Tuscany for nearly 30 years. When she left the UK she was UK domicile. The house and its contents are her only assets and they are valued at £1,500,000.
The house will be left to her children; because of the cost of upkeep they will sell the house once they inherit it.
Lady Putney requires 24 hour help at the house so the care costs are high but the rental income from part of the house nearly covers the cost.
The children want to move their mother back to the UK so the house can be sold.
Lady Putney dies a year after coming back. The house was sold for £1,500,000 and this was roughly the amount inherited by her children.
The UK authorities tax the inheritance; a tax bill of circa £480,000.
Lady Putney remains in Italy and dies there. The Inheritance tax bill is nil but there are transfer taxes of 3% paid on the “notional” cadastral value.
Paul and Sandra are retired and live in Umbria. Sandra has a pension from a purchased annuity of £70,000 per annum. If her commercialista gave her the best advice she would probably pay taxes of £6,250 on the capital element which is worth £50,000. If he did not she would be expected to pay circa £17,000.