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bigduckontax
bigduckontax, Accountant
Category: UK Tax
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Im purchasing a property in italy, ready to sign compromesso

Customer Question

Hi, im purchasing a property in italy, ready to sign compromesso and pay deposit, but have only found out that Italian taxation will attack any UK assets I have. I have a house that I cannot sell due to lease problems therefore have to keep it until a year I can sell it, it has a mortgage, therefore i will have to have a bank account with some money in incase of problems with the house, bills etc, also understand tha italy will tax my savings. plus other things I have heard
Submitted: 1 year ago.
Category: UK Tax
Customer: replied 1 year ago.
my partner is retiring in 2 weeks from the police, we will both be living off his pension, we do know the police pension will not be taxed that we did find out but be tight with both of us living off he pension plus bills, living etc.. but now understand that italy will tax us both for everything and anything to do with the UK. This now scares us both as it may be the wrong move for us, and dont want to make a huge financial error at our later years of life in retirement. I do not have a pension. I will have a bank account in the UK so will my husband as he will have his pension paid through it to italy.. We asked for residency as thought was cheaper at 2% than 10% of property price, as is ridiculous! but now thinking different.. What will we be taxed on, as it sounds will be taxed in italy will be taxed in UK, no one has given us any information regarding tax, not even our lawyers... feel lost! and feel as though we have no choice but pull out of the sale...we dont want to - like said dont want to make a mistake that will cost till the end... we were looking so forward to this but now feel sad. Is it better to be resident or non resident in italy regarding taxes and the uk? how many days are you allowed to stay in the italy as non resident etc... any information will help as now we are really upset and need help re information on Tax in Italy and UK, Just need to know what we will be paying in taxes, how much, percentage of all items that will be taxed and how do you go about (if we continue) in a way that wont hurt us need to know what we have to to urgently, as we need to make a big decision v soon, as must sign compromesso and give deposit either this week or next... look forward for your urgent reply, thank you Marta
Customer: replied 1 year ago.
Please give us a concise correct direction of Italy/uk Taxes for Resident and Non Resident and what we should do, who we should contact, or is there somewhere that will do i all for us, as we know nothing at all.... its all new to us, new territory, Im hoping it is not as scarey/complicated as we both feel at the moment it is... looking forward to your reply with correct direction and information thank you again Marta
Customer: replied 1 year ago.
Hello can someone please answer my questions, thank you
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
Right, let us get down to basics. When each of you finally departs these shores make sure you send a Form P85 to your respective tax offices. On receipt HMRC will classify you as non resident for the tax year following your date of departure and furthermore split the departure year into two portions, one resident and one non resident.
Now pensions; it is normal for pensions to be taxed in the country of origin. It happens to literally thousands of ex pats. Your Personal Allowance will offset your liabilities.
When you reside in Italy they will tax you on your world wide income. This is perfectly normal. However, there is a Double Taxation Convention in existence between the UK and Italy which precludes the same income stream being taxed in both jurisdictions. This is achieved by tax credits, the tax in these cases deducted in the UK being allowed against Italian taxation. The Convention does not, however, protect you from differences in rates of taxation.
Italy does not tax your savings, it, like most countries, only taxes the income derived therefrom. Rates of tax in Italy are higher than the UK:
'Tax (%)
Tax Base (EUR)
23% 0 - 15,000
27% 15,001-28,000
38% 28,001-55,00
41% 55,001-75,000
43% 75,001 and over'
There is also a regional tax of 1.2%-2.03% and a municipal tax of 0.1%-0.8% to take into account also.
In Italy capital gains are added to income and taxed as above. this again is not unusual; Australian tax works in the same way for example.
As far as the UK is concerned you have an 18 month buffer within which to sell your sole or main domestic residence and Private Residence Relief, at 100%, is extended for that period.
I hope that I have covered everything in my explanation. Please feel free to come back to me if I have missed some vital point, but speed is of the essence, see below!. There are many thousands of ex pats world wide. I, for example, am responding to you from Thailand where I am spending a month's holiday in Bangkok and Chiang Mai [go to the latter destination tomorrow until Sunday].
Customer: replied 1 year ago.
Thank you ***** dont think I will be able to sell my property for many years as will take a very long time to sort out the issues that I have.... meaning could be handful of years, and wil in that time be rented out... Just wish there was someone who actually sorts all this awful taxation lark out for us, as is a minefield for someone who knows nothing about tax... but thank you so far, I
will show my other half this information if not today will be later and probably get back to you later / tomorrow at latest.. thank you talk soon Marta
Customer: replied 1 year ago.
Oh Just thought, If I keep my house for many years and sell at a very later date, do Italy have any rights on taxation on my house when I sell it?
Expert:  bigduckontax replied 1 year ago.
Right, if you cannot sell for some time the 18 month rule still apples to the last 18 months of ownership. If you rent it out then any gain you make will be liable to UK Capital Gains Tax (CGT). To calculate the gain you need the difference between the acquisition and the disposal price. The acquisition price is the price paid plus the purchase costs plus any improvements eg installation of double glazing, central heating, extensions etc, but not routine maintenance and the disposal is the net sum received after selling costs. Now only a proportion of this gain is exposed to CGT and that is the period it is let out less the 18 months aforementioned. For the rest Private Residence Relief applies. You have an Annual Exempt Amount (AEA) of 11.1K to offset this gain and as you lived in the house before you let it you will be entitled to Lettings Relief up to 40K in place of the AEA. Depending on your total ownership time viz a viz the adjusted let time and your reliefs you could find that you have no UK CGT liability; the longer the ownership the less the proportion exposed to tax. You may well be liable to Italian income tax on the capital gain. Again the Double Taxation Convention applies.
Remember too that any routine maintenance and agents fees etc are allowable against the rental for income tax purposes. You will have to continue to make UK self assessment tax returns whilst you are in receipt of rental income. Again this is perfectly normal for ex pats.
You may well need local professional guidance over your Italian tax position once you are resident in that country particularly over the capital gain position.
Don't be frightened; you are not into the Dad's Army 'Don't Panic' situation quite yet. Remember as you look at Italian tax rates that the UK is considered a tax haven these days and thank your lucky stars you did not choose Belgium where you would be taxed out of existence! Benjamin Franklin was right when he said that in life there are but two certainties, death and taxes.
Oh, by the way, why am I in Bangkok? I have a Thai wife.
Expert:  bigduckontax replied 1 year ago.
I should have mentioned that the Italian tax regime allows indexation of capital gains. That is long gone in the UK with a rebasing in 1982 and a reduction in the rates of CGT. Now you see why I mentioned that you will need local professional advice.
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Customer: replied 1 year ago.
so, if you sold ou house in the UK and if there any profits, then I guess it will be taken in italy and also inheritance tax, eg if anything happens to my parents - I know in UK there would be no gains as would be under 300k but what about if residing in Italy do they take inheritance tax ? what percent? This is like a mine field... not pleasant journey this so far... really puts you off the idea
Expert:  bigduckontax replied 1 year ago.
Here, the news is better. Spectrum IFA Group summarise:
'Italian Inheritance Tax (IHT) law dates back to the Napoleonic period which requires parents, on death, to leave a major proportion of their wealth to their children instead of just their spouse.
At the moment Italy’s Inheritance tax works as follows:
* If the estate is passed to your spouse or relatives in a direct line (i.e children) then they are required to pay 4% on the value of the inheritance that exceeds € 1million.
* Brothers and sisters must pay 6% with an allowance of €100,000
* Other relatives must pay 8% but without any allowance.
Despite Italy having approximately 1.5 million people who are subject to Inheritance tax each year with a combined value of approximately €56 billion, the tax collection is relatively small due to the high allowances and also the fact that that ‘successione’ for a property is based on the catastale value, not the market value.'
Presumably your parents reside in the UK and in the event of their demise any estate over 325K is taxed at a flat rate of 40% (36% if 10% or more is charitably bequeathed). Spouses can inherit any unused 325K allowance making a possible 650K exemption before the tax kicks in. The 325K limit is inflated by any inter spousal bequests (outside the scope of UK IHT), ditto charitable bequests.
Assuming they reside in the UK their estates will not be subject to Italian taxation and you would receive any inheritance free of Italian Tax. Italy is, as far as IHT is concerned, very much a tax haven anyway.
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