Owning a second home in the UK presents administrative and logistical challenges, but at least that second home is within linguistic, tax and legal frameworks that are familiar. 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 UK ownership of Italian property increase as the UK economy recovers and people take advantage of favourable property prices compared to the UK. While accurate data are not available regarding UK ownership of property in Italy, according to 2015 UN statistics, there were an estimated 66.000 UK born nationals living in Italy.
If you are considering buying a property in Italy, tax and succession aspects should be very carefully thought through. You should always seek independent tax and legal advice, from local experts in Italy as well as from advisers in the UK.
There are a number of tax issues to consider in Italy and in the UK. A tax event may be triggered in either or both the UK 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
UK residents are liable to UK income tax on all income, regardless of where this arises. 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 in both countries.
CAPITAL GAINS TAX
UK residents who own a property abroad, which is not considered to be their main residence, need to bear in mind that they will be subject to UK Capital Gains Tax on any profit made when the property is sold or transferred. There will also be a liability in Italy so again, advice should be sought.
Individuals who are domiciled 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 ruling succession. Even after the UK triggers Article 50 to leave the EU, Brussels IV will still be applicable to UK nationals who own assets abroad.
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. 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 UK 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 in the UK and Italy.