What are the tax and inheritance aspects of owning a second home in Italy?
Owning a second home in your home country presents administrative and logistical challenges, but at least that second home is within linguistic, tax and legal frameworks that are familiar to you. The challenges escalate with a foreign property, particularly in relation to succession law and tax issues. Italy is a popular choice for second home ownership and in recent years we have seen foreign ownership of Italian property increase as people take advantage of favourable property prices. If you are considering buying a property in Italy, you should carefully think through tax and succession aspects. You should always seek independent tax and legal advice, from local experts in Italy as well as from advisers in your home country.
There are a number of tax issues to consider in Italy and in your home country. A tax event may be triggered in either or both your home country and Italy on any of the following:
- Disposing of a capital asset (e.g. property or investments) to raise funds for the purchase of the Italian property
- Transferring money to Italy
- Associated tax payments to buy the property (the local equivalent of UK Stamp Duty)
- Local service taxes on the running of the property
- Income tax from letting the property
- Estate and transfer taxes on the death of an owner
- Capital Gains Tax on the transfer or sale of the property
If you are resident outside of Italy, you may be liable to pay income tax on all income, regardless of where this arises. For example, UK residents who generate an income by letting an Italian property will be subject to UK income tax on the rental income. There will also be a liability to pay tax in Italy. There may be some double taxation relief, but it is essential that prior to purchasing a second home and prior to commencing any rental activity that you seek advice at home and in Italy.
Capital Gains Tax
Overseas who own a property in Italy, which is not considered to be their main residence, need to bear in mind that they may be subject to Capital Gains Tax at home on any profit they make when the Italian property is sold or the title is transferred. There will also be a liability in Italy so again, advice should be sought.
Individuals who are domiciled for example in the UK are subject to UK Inheritance Tax (“IHT”) on their worldwide assets in the event of their death. UK IHT does not therefore just apply in respect of assets physically located in the UK if an individual is domiciled in the UK. Italian Estate Tax applies to the entire net value of the decedent’s estate, including movable and immovable assets. Rates depend on the relationship of the beneficiary with the deceased, as follows: Spouse and children: 4% of the estate value, with an exemption of EUR 1 million for each beneficiary. Siblings and close relatives (up to fourth degree of kinship): 6%. Each sibling is entitled to an allowance of EUR 100,000. Any other beneficiary: 8%, without allowance. There may be some double taxation relief available, but as each case is different, it is crucial to take advice before purchasing a property in Italy.
It is essential to take advice on the succession implications of owning a property in Italy at an early stage, both from an Italian solicitor and from a solicitor in your home country. Solicitors should be experienced at managing all aspects of issues which arise when dealing with cross-border assets or estates. Generally, succession to a property is governed by the law of the country where that property is physically situated, although a 2015 EU Regulation known as, “Brussels IV”, makes it possible to nominate a jurisdiction to rule your succession. Even if your home country is not part of the EU, Brussels IV will still be applicable to non-EU nationals who own assets in Italy. It is wise to make a separate Will in Italian, to ensure that your property passes to your chosen beneficiaries after your death in the most tax efficient way. Based on Roman law, Italy has, “Forced Heirship” rules which govern what your next of kin receive from your Italian estate. Seeking professional advice is therefore essential to understand how these rules will apply to your specific circumstances. Even if an Italian Will is not strictly required, your local solicitor will wish to confirm that your home country Will would be given precedence in Italy in the event of your death. When preparing an Italian Will, make sure that your local and Italian solicitors communicate with each other. This ensures that the legalities concerning your personal circumstances are harmonised at home and in Italy.
For more in depth information about Italian succession, you might find our Succession Guide useful. If you would like to discuss your personal situation, you can reach us here for a free consultation.
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