I was once asked by a partner of a UK private client firm whether trusts are known in Italy. It was a question posed out of curiosity but seriously put as he obviously had not come across the experience.
Not only are trusts known in this country, I replied, but they have become increasingly popular in recent years, not merely as a topic of study for students and academics but also as a tool used by practitioners for their clients. Which came much as a surprise for him. And he sounded intrigued to hear more about this, so I went on.
When and how was the Trust recognised in Italy?
We are well aware that the trust is a concept deeply rooted in Britain and other jurisdictions based on Common law, so continental Europe will never be able to match in this area an ancient, highly developed and sophisticated system of rules such as English law. On the contrary, the history of trusts in Italy is only a few decades old. There are a handful of court cases pre-dating the 1980s in which judges were mainly asked to decide whether UK trusts could lawfully hold Italian property or the settlor could rightly exclude in a will some close family members from the class of beneficiaries. A very awkward subject in those days, especially for judges altogether unfamiliar with the culture of a trust jurisdiction such as the UK, who would tend to resolve the issue by denying status and rights to trusts and beneficiaries except for closest family members.
But the Hague Convention of 1 July 1985 was a milestone in that it brought a radical change in our legal system such that foreign trusts could at last be formally recognised. The effect of that piece of legislation went even beyond its objective of official recognition of foreign trusts, and encouraged (or incentivised, at least sometimes) the proliferation of domestic trusts, despite the lack in our system of specific tax and non tax law provisions.
Proliferation in a short space of time is often accompanied by rush, naivety and low standards. Many professionals were unprepared but quite a few embraced trusts and its Convention with enthusiasm and, by promoting aggressively their consultancy services, they came to the forefront of the market. Courts and tax authorities were not much more competent than those consultants. Some clients who had barely heard the word ‘trust’ until the day before suddenly hoped to have found in trusts their solution to most of their concerns about how to treat family wealth; or a safer alternative to arrangements already impacted by Italian tax authorities, such as putting their monies into a Swiss bank account or becoming resident in the Principality of Monaco along with some of the best paid footballers. They were seeking to avoid tax or transfer their property to some rather than all of their children and were desperate to shelter and sometimes even hide assets from their creditors. And these attempts were almost invariably doomed, often following a long and expensive litigation.
Why is the Trust so popular in Italy despite early reservations and even suspicion?
As Italy is a highly litigious country, courts have strictly enforced legal principles and restrictions and remedies have been introduced, including increased protections for defrauded creditors. Thus, while paying a price for the several mistakes made, with experience also came higher standards. Even though trusts nowadays continue to be considered by most people a tool only for the elite of millionaires, their popularity has increased. The increased competence of specialised consultants and tax authorities alike has shown trusts can help achieve also in this country legitimate goals of asset management and succession planning. And although trusts’ set up expenses and running costs generally remain relatively high for the majority of people living here they are no longer unaffordable for families of medium to high wealth. Thus trusts have begun to be used to help families look after disabled children, debtors cooperate with creditors to discharge debts and ease generational change for businesses. Finally, new important professional roles have emerged, such as the one of local trust companies.
However, in order to make further improvements and exploit it more fully, we still need a substantive law which introduces a comprehensive body of internal rules on trusts, since currently all we can rely on is the Hague Convention and its broadly uniform body of rules of private international law. To regulate trusts set up in Italy we are still forced to look abroad for their governing law and we tend to prefer the law of a trust jurisdiction, such as a legal system based on or influenced by common law (in this country, Jersey law is the most fashionable and often utilised since despite its French ‘flavour’ it is regarded as the most advanced body of rules on trusts since a major reform passed in this Channel Island in 2006). We also badly need a more structured, detailed and clearer set of tax provisions and more consistent court precedents on its treatment. This is more or less the current situation in Italy as far as domestic trusts are concerned. Furthermore, it will take a long time before the Italian system allows local trusts to crop up in a wide variety of circumstances so that they appear in wills or are wrapped around life assurance policies as is the case in the UK.
Overview of Italian Taxation of Trusts
The main taxes relevant to trusts considering them from an Italian perspective are Inheritance Tax (IHT) and Income Tax (with Capital Gains Tax being normally dealt with as an extension of the latter).
By and large, settling property on Italian soil in a trust triggers an entry charge under IHT rules. As it may happen that the trust is set up before property is actually settled, only a modest registration tax (ie €200) is payable forthwith and liability to IHT arises only when the latter step is taken. According to a 2016 precedent of the Court of Cassation, which created much controversy among commentators and practitioners, a trust deed, whereby the settlor appoints himself as trustee, does not result in a tax liability to IHT until the trust fund is actually transferred to the beneficiaries.
At present, IHT in Italy can be summarised as follows: one has to offset the value of the net estate (ie the gross estate calculated by summing up the value of all assets, including lifetime gifts – NB not all assets are taxable, for example state bonds and family businesses – less all liabilities) to the relevant nil rate band if applicable with any excess value taxed at the appropriate increasing rates, depending on the closeness of the family tie between the deceased and respective beneficiary. Spouse and children have a nil rate band of €1m, and any balance is taxed at 4%, while siblings can rely on a nil rate band of €100k, and the difference is taxed at 6%. More distant relatives up to the 4th degree pay IHT at the same rate as siblings but have no nil rate band to offset and finally no nil rate band is available to all other beneficiaries, who pay IHT at 8%. On the other hand, disabled beneficiaries are always granted a nil rate band of €1.5m.
In addition to IHT, if the estate includes land or immovables, such property is also subject to charges tax at the rate of 2% and cadastral tax at 1% of its cadastral value (ie tax value, usually lower if not much lower than the market value). However, whenever this property qualifies as a ‘family home’ (ie “prima casa”) each of these two additional taxes is levied at the fix sum of only €200.
So, how does the above apply to trusts? Let us assume for example that Mr X owns property worth €2m. If he decides to set up a trust for his wife and only child and the trust fund is worth say €1.2m, there will be a tax liability as the arrangement is tantamount to a lifetime gift. IHT shall be payable but only on the excess of the nil rate band at 4% (ie €8,000). The fund mainly consists of investments and savings (ie €900k), but it also includes a family home with a cadastral value of €200k and a holiday home with a cadastral value of €100k. The aggregate bill to discharge for charges tax and cadastral tax shall be €3,400, hence the total tax payable on settling the fund is €11,400. The settlor’s remaining property consists of a business worth €600,000 (ie an exempt asset) and bonds worth €200,000. This means that on death his estate shall be liable to another €8,000 if the beneficiaries are spouse and child (NB once used up for lifetime gifts, the nil rate band may not become available again, no matter how many years pass from the date of the gift to the date of death). On termination of the trust and distribution of the fund to the beneficiaries there will be no ‘exit charge’ to apply.
Income tax on trusts is called IRES (ie “imposta sul reddito delle società”) and is the same tax which applies to companies (at a current standard rate of 24% but the new budget has reduced it to 15% in certain circumstances). However there are exceptions, such that its computation follows the same rules of personal income tax by adding up all the relevant items of income. Another exception is that unlike ‘income from capital’ (ie largely dividends, yield, interest and similar financial revenue) trust income is taxed even before distribution, namely as soon as it arises and not yet been distributed to or ‘received’ by a beneficiary. Trusts which are liable to IRES include those which are resident in Italy regardless of whether they carry on a business or otherwise and comprise trusts which are not resident and yet become liable to IRES to the extent that their income arises in this country.
The tax liability rests on the beneficiaries – whether or not it is discharged by the trustees – if the trust is transparent (ie the beneficiaries are identifiable), while liability shifts on to the trustees where the trust is not transparent (ie a discretionary trust, where it is up to the trustees to decide who, whether and when should benefit). In practice, a trust may sometimes be regarded as a hybrid or transparent only to an extent, such as whenever the deed of settlement provides that income should be partly added to capital and partly appointed to beneficiaries. In such a case, liability ought to be apportioned between the trustees and the beneficiaries. Obviously over the same income which has been taxed once in the hands of the trustees, income tax cannot be levied again, namely when it is destined to beneficiaries. But the rules become more complex if the income stems from financial investments, since it often happens that a withholding tax, or a so called ‘substitutional tax’, must be applied in the place of, or partly in addition to, income tax.
Britons who plan to move to Italy. What do they need to know?
So how can an English trust have anything to do with the Italian system? It depends on the features of it – such as settlor, beneficiaries, trustees or the settled property – which may from the outset, or at some later stage, start to have a connection with Italy. To begin with there may be foreign elements which could impact residence and ultimately lead to a special tax regime. Which is when things start to become ‘cross border’ so to speak.
UK resident and non resident trusts
In the UK, a trust is treated as resident and ordinarily resident at any time if (a) all the trustees are resident in the UK, or (b) at least one trustee is resident in the UK and at least one trustee is not resident in the UK and the settlor is resident or ordinarily resident or domiciled in the UK when the trust is set up (whether in lifetime or on death). On the contrary, non resident trusts are usually those where (i) none of the trustees are resident in the UK for tax purposes, or (ii) at least one of the trustees is resident in the UK (the other being non resident) but the settlor of the trust was not resident, ordinarily resident or domiciled in the UK when the trust was set up or funds added. Special rules apply to the treatment of non resident trusts for Income Tax, Capital Gains Tax and Inheritance Tax.
Resident and non resident trusts in Italy
Can a non UK resident trust be (or become) tax resident in Italy? Under our domestic tax rules, a trust is regarded as resident in this country if, during the relevant tax year, (i) it is managed with offices on Italian soil, which means that the trust has local employees and rents or otherwise uses premises here or (ii) its main objects are pursued in this country, namely the trust owns property situated in Italy or carries on a business here. Therefore a trust set up in the UK by a person not domiciled in the UK whereby (a) the trust fund is made up of property situated in Italy and (b) there are two trustees, one resident in the UK and the other resident in Italy, would be considered from a UK tax perspective a trust non UK resident and from an Italian angle a trust resident in Italy.
It is important to assess the moment in which a trust may be regarded as Italian resident for tax purposes because of the settlor and a beneficiary becoming resident in this country. It seems irrelevant whether settlor and beneficiary have become Italian resident in the same tax year. As regards the settlor, all that matters is whether he was resident in Italy when he set up the trust and settled his property. If he was so resident the trust would also be resident in Italy. As regards the beneficiary – whenever the trust is a fixed trust – he may have become resident in this country up to one year later than when the trust was created and funded, and yet his Italian residence ‘attracts’ the tax residence of the trust.
A trust which is resident on Italian soil is liable to Income Tax on a worldwide basis (that is wherever the income arises) – subject of course to rules against double taxation if the relevant treaty is applicable – whereas if a trust is non resident it would only pay tax on any income which arises on Italian territory.
Sometimes even the assessment as to whether a trust is resident in the UK, Italy or elsewhere can be rather complex (and may only be unravelled after a detailed analysis of the arrangement according to treaties against double taxation and specialised guidance publications). Whenever a person may be considered tax resident in more than one state these bodies of rules identify the country where he/she is predominantly resident and help him/her avoid having to pay tax twice on the same income in two different countries. But even this exercise is not always straightforward. It is relatively easy to assess the Italian residence of a trust whenever the trust property includes land on Italian territory and investments in Italian stock or bonds managed by financial managers based in Italy. However, it is more, if not much more, difficult to locate the appropriate tax residence when there is also land held abroad or the trust fund includes foreign investments managed through financial institutions based outside Italy, or a mixture of both. Clearly, if the trustees happen at some stage (even by moving from the UK) to be based in Italy or be resident in this country or the trust fund is mainly held or managed on Italian territory there is a strong inference that the trust might be resident here for tax purposes.
Timing of any planning for expats to be
British nationals, who are either resident in the UK or elsewhere but planning to move to Italy in the short and medium term and live here for an indefinite period, may wish to continue to consider trusts in their family asset planning and to use them in subsequent implementation. For tax purposes, there are relatively safe ways in which property may be held in a trust set up in the UK even if the trust or one of its beneficiaries becomes Italian resident. For instance, an International Unit Linked Life Assurance policy can in many cases be a simpler and more appropriate vehicle to deal with Italian tax, IHT, as well as the security and portability of assets. An offshore bond could be a good asset to be held in trust to ease a tax liability if the liability falls upon the trustees, since it is a ‘non-income’ producing asset. The arrangement may well work also from an Italian tax standpoint, but there are specific rules to be borne in mind as to payments out of foreign insurance policies to Italian based beneficiaries. However, the chargeable event rules in relation to the bond also need to be considered. Offshore bonds have the advantage of ‘gross roll-up’ which means income is received gross of any income tax within the bond wrapper and will only suffer income tax upon any future chargeable events. In the UK, it is also possible to withdraw 5% tax deferred each policy year for 20 years without incurring an immediate tax liability.
However if any British nationals are about to move to Italy (even if they have already settled property in a UK trust but all the more so if they have not) – they should first make sure that they may safely leave the UK under domestic tax rules – and they should take detailed advice on all the fiscal and financial implications of their move, especially if they intend to use a trust once they personally become tax resident in this country. Not least if the trust they have set up may qualify as ‘non resident’ in the UK and after consideration there are no major pitfalls as to make it become Italian resident, there may be rules in the UK which still need to be complied with. Tight provisions against money laundering mean that trustees of all trusts with UK tax implications need to register, giving HM Revenue & Customs a detailed picture of the assets held in a trust, as well as the identities of trustees and beneficiaries. The register imposed by the 2017 Regulations is not limited to trusts that are tax resident in the UK. Trustees resident outside the UK where there is some UK connection such as a UK-resident/domiciled settlor or beneficiary or an underlying asset in the UK need to check whether they are under an obligation to register and maintain records.
On the whole, there is a clear advantage in maintaining a trust resident in the UK whenever possible, unless there is a compelling reason to move its residence to Italy. A comparison between UK and Italian tax rules on trusts would be very difficult to make and is in any event beyond the scope of this article. However, in essence, one may hopefully argue without raising too many eyebrows that the Income Tax treatment of trusts is generally more lenient in the UK than in Italy. On the other hand, Italian IHT is, at least in principle, more generous than UK IHT but in Britain there still are several tools which enable people to plan in advance effective ways to minimise IHT liability on their estate. And, of course, in the UK, the whole system (including courts, consultants and other professionals active in this sector) is much more settled, developed, competent, ‘trust friendly’ and, to say it in one word, reliable than in Italy. On that basis, it is easy to expect that most of those who intend to leave the UK and head for the sunshine of the “bel Paese” would still prefer to set up a trust in the UK well in advance of their move and maintain in the UK the larger part of their entire wealth. Indeed, these people would usually want to retain their UK domicile and return to the UK at some later stage in life.
Roberto Barbalich, 4 February 2019
NB This is only a general overview with some specific but simplified examples and should not be taken for advice. Each and every matter is different from the others and requires an individual assessment from a consultant. We would be very happy to answer any queries you may have though by contacting email@example.com.
Roberto Barbalich is a dual-qualified lawyer in Italy and in England and Wales with experience going back almost thirty years, first with firms in Milan and London, and now with his own practice in Italy. He advises and assists UK and Italian clients on contract and commercial laws, corporate law, banking, conflict of laws, law of trusts, international successions, cross-border taxation and property. In these fields he published a number of articles and has lectured to audiences in Italy and the UK. He is an Editor Consultant of the Trusts & Wealth Management magazine.
Unity Financial Partners invited Roberto Barbalich to write this article for Britishinitaly.com as a guide for UK nationals interested in regularising their residential status in Italy.
The contents of this article have therefore been provided by Roberto Barbalich and Unity Financial Partners does not assume responsibility for the accuracy of the information provided.
If you are interested in finding our more about how Unity can help you with your personal financial planning needs in conjunction with becoming a resident in Italy in Italy please contact us on the following link: