Italy, The Inheritance Tax Haven: A Guide for Expatriates in Italy

Inheritance Tax Often Complicates Expats' And Retirees' Lives

Expats and foreign retirees, who by definition move to different countries, often find their tax affairs more complicated by inheritance tax planning. Often misunderstood and feared, inheritance tax is one area in which Italy can be rightfully considered a tax haven.

Our mission at Expatax is to make tax matters more comprehensible, and we invite you to utilise our TAX AI tool located at the end of this article to further delve into any queries you may have.

Inheritance Tax: Complex For All, And Especially For US Expatriates

Globally, inheritance taxes spark considerable discussion and are perhaps the most disliked of all taxes. These levies, usually activated by death, can be broadly grouped into two categories: estate and inheritance taxes. Estate taxes apply to an individual's net property value at their time of departure; whereas, inheritance taxes are applied to the recipients of such properties.

Gift taxes frequently accompany these, acting as a prevention mechanism against property transfers prior to death which essentially dodge tax obligations. These taxes are largely unpopular, often being perceived as economically inefficient in terms of the overall impact on a nation's accumulated wealth.

While it is true that US estate taxes are high at a glance, in reality there is a substantial exemption limit (over 12 million dollars for 2023), which means that a large majority of US passport holders who live abroad never need fear any tax falling on their estate. While some US states also have estate taxes, if you permanently reside abroad, you needn't fear those either. So to grossly oversimplify, unless you are a very high net worth US citizen, you need to worry about other countries' inheritance taxes - foremost, the ones in the country where you reside.

Inheritance Taxes Are Often Nicknamed "Voluntary Taxes" - For Good Reason

A comparison of the highest estate and inheritance tax rates amongst OECD member countries indicates a distinct pattern. The United States, while noted for its high marginal rate on estates, is out-taxed by nations such as Japan, South Korea, and France with even higher rates. Conversely, 15 of the 34 OECD members impose no taxes on properties inherited within family lines.

However, it is important to note that careful planning ahead often allows expats and retirees to avoid that the taxman axe their estate to the disappointment of their heirs. Even in the UK, a country with an infamously high inheritance tax - set by default at 40% - and relatively low exemption thresholds, there are well-known ways to reduce the taxable estate. These are topics well worth discussing with a competent tax adviser well ahead of one's later years.

The Most Important Concept: Two Countries Can Lay a Claim To Your Estate

Leaving US citizens aside - who as we saw earlier, are taxed based on their passport rather than their country of residence only, and in this are quite exceptional - you generally need to worry about two countries when it comes to inheritance tax: the country where your assets are based, and the country in which you are a tax resident. While for most people these are one and the same (imagine a UK citizen who lives in London and has all of their wealth there), for expats and foreign retirees it is quite likely that one's tax residency and the location of at least some of their assets are different. Again, by example, this could be a German citizen who permanently lives in Italy and still owns a home in Berlin. In this case, our German friend would need to factor in both Italian and German inheritance taxes.

Italy as an Attractive Inheritance Tax Judisdiction

As mentioned, Italy is a benign, low-rate jurisdiction for inheritance tax. A "dichiarazione di successione" must be made after the testator's death, with the following general tax rates:

• 4% for transfers made in favor of a spouse or direct relatives (ancestors and descendants), applied on the overall net value exceeding, for each beneficiary, the amount of 1 million euro
• 6% for transfers in favor of brothers or sisters, applied on the overall net value exceeding, for each beneficiary, 100,000 euro
• 6% for transfers in favor of other relatives up to the fourth degree, in-laws in the collateral line up to the third degree, applied on the overall net transferred value, with no exemptions applied
• 8% for transfers in favor of all other subjects, applied on the overall net transferred value, with no exemptions applied

Furthermore, with the use of lifetime gifts, these taxes can be reduced still.

Conclusion: A Matter Worth Considering Well in Advance

In conclusion, estate planning is undeniably a complex and intricate process. The multitude of scenarios that can arise make it crucial to seek expert advice. Therefore, it is strongly recommended that you consult with a qualified tax adviser. They can guide you through these complexities, ensuring that your estate planning aligns with your unique circumstances and objectives. Each case differs, and a tax professional can provide the personalized approach necessary for effective estate planning. Remember, the right planning today can save significant stress and financial burden for your loved ones in the future.

Sources

The Italian Agenzia delle Entrate on the topic of inheritance tax