Inheritance and Gift Tax in Italy

Inheritance tax is a fact of life (or more accurately, a fact of death) in all western European countries - in various guises it is found in France, Spain, Germany and the UK. Regulations vary: some countries tax the estate of the deceased, while others tax the individual beneficiary. Until the year 2001, Italy had one of the toughest inheritance tax regimes in the world: uniquely, it used to tax both the estate of the deceased (Imposta sul Morto - death tax) and each individual beneficiary on the legacy received (Imposta Individuale - beneficiary's tax).

In 2001, the Berlusconi government abolished the Inheritance and Gift Tax (Imposta sulle donazioni e successioni). As a result of this reform, no Inheritance and Gift Tax was then payable on legacies or gifts paid to spouses, children or other relatives up to the fourth degree. It was hoped that this reform would halt and then reverse the export of capital from the country - and in this it was largely successful.

However, many commentators reckoned that this dramatic policy reversal wouldn't last - and it didn't. In 2007 the new Prodi government, desperate to increase state revenues in any way possible, re-introduced Inheritance and Gift Tax - but in a very mild form. The new tax rates are still much lower than those applied before 2001, and compare very favourably with the inheritance tax rates applied in other western countries. Features of the new Inheritance and Gift Tax are as follows:

• Any legacy or gift above €1 million paid to each spouse, child or parent attracts Inheritance and Gift Tax at the rate of 4%.

• Any legacy or gift paid to a sibling attracts the tax at a rate of 6% on the amount that exceeds €100,000.

• Other relatives up to the fourth degree pay 6% on the full amount.

• Unrelated persons (or bodies) pay 8%, also on the full amount.

The existing minor property transfer fees (Imposta Ipotecaria at 2%, and Imposta Catastale at 1%) remain in place. Note, however, that:

• These fees are based on the official, local Land Registry value (rendita catastale rivalutata) which is usually much lower than the current market value.

• If the person inheriting the property then uses it as his/her primary residence, the fees are reduced to a flat sum of only €336 !

International Comparison of Inheritance Tax Rates

This is a complex and fluid subject. At the time of writing the comparison with a few other western countries is illuminating:

• In the USA, a surviving spouse pays nothing. All other bequests above $1.5 US are subject to federal taxation at 45%, with additional local taxes pushing that figure above 50% in many states. When the current republican administration came into office in January 2001, the lower threshold was only $675,000: it has more than doubled in just 5 years.

• In the UK, a surviving spouse again pays nothing. All other bequests above £275,000 (€396,000) are subject to taxation at 40%.

• In Germany, inheritance tax is paid by the beneficiary: spouses pay 7% on legacies above €307,000 Euro, rising to 30% on legacies above €25.9 Million ($31.5 Million US) on a sliding scale. Non-spouse relatives pay 12% to 40%, and non-relatives pay 17% to 50% on legacies above €307,000, rising on a similar sliding scale.

• In France, as in Germany, inheritance tax is paid by the beneficiary. A surviving spouse pays 5% on legacies above €76,000, rising on a sliding scale to 40% on legacies above €1.776 Million. Other relatives pay at similar rates but with lower tax-free allowances, while non-relatives pay at up to 60% with nearly no tax free allowance.

• In Spain, even spouses have to pay 8.5% on legacies above €16,000, rising to 34% on legacies above €800,00, with a complex exemption system that depends on the length of time post mortem that the beneficiary keeps the assets. When the surviving spouse dies, inheritance tax has to be paid again - but this time on 100% rather than 50% of the assets. The Spanish tax system appears specifically designed to capture non-domiciled and second-home-owning beneficiaries.

Of course, the new Italian inheritance tax rates are still lower than any of these.

And we haven't even mentioned the Scandinavian countries, whose citizens pay the highest taxes in the world. Although Sweden has abolished inheritance tax, it now charges its citizens a wealth tax of 1.5% of their assets above £200,000 ($400,000 US) each year: this raises far more revenue than the old, abolished inheritance tax.

What are the implications of this change?

The new Italian measures mean that the average villa or farmhouse will still be exempt from Italian Inheritance tax on the owner's death. For example: if a husband and wife jointly own a property valued at less than €2 Million, and inherit eachother's share on the death of either of them, no Inheritance Tax would be payable. If the surviving spouse then leaves the same property to two children in equal shares, again no Inheritance Tax would be due.

The same rules apply to both Italian and non-Italian owners: however, a foreign owner would need to be domiciled in Italy (i.e not taxed by a foreign government) to gain this advantage. Tax planning, a field much loved by lawyers throughout the western world, is certainly greatly simplified for the majority of residents in Italy.

To summarize: if you want to protect your wealth for the benefit of your family, relocating to Italy might be the best move you could make.