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This blog is intended to be a reference point for the English speaking community in Italy. It is written by Gareth Horsfall, an Independent Financial Adviser, who has been working with this section of the Italian community since 2004. More Info

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Expat Finances in Italy

Tax Efficient Life Assurance Bonds in Italy

March 20, 2012

Here is an  example of the potential tax savings of investing through Italian compliant Life Assurance Bonds.

For ease of understanding I will do a comparison:

Let’s assume you have a diversified portfolio of assets to the value of 200,000 (either in Italy or in another country)

1.  If you  invested directly in the underlying assets then you would be subject to 20% Capital Gains tax (in Italy) on any holdings which were  bought and sold in any one tax year.  Similarly any income would be subject to the relevant income tax rate depending on the type of income.  e.g 20% on share dividends (this covers most people ).

Therefore if your fund rises from €200K to €220K and you cash in the €20,000 then you would be subject to capital gains tax of 20% of the gain made.  i.e 20% of €20,000 = €4000 Tax to pay

2.  If you invested the same money in a Life Assurance Investment Bond then the tax bill would be considerably lower:

If the portfolio rose by €20,000, then this would constitute a 10% gain on the portfolio.  In theory (the figures are not exact, but work for the purpose of this example), the portfolio will now consist of 10% capital gain (€20000) and the remainder (€200,000) is the original capital and will constitute the other 90% of the funds in the WHOLE portfolio.

If you withdraw the €20,000 from the portfolio, then this is assumed to have been withdrawn in the same proportions as the WHOLE portfolio at time of withdrawal.  i.e 10% Gain and 90% original capital.

Therefore, €20,000 (the withdrawal), is split 10% (€2000) Capital Gain and 90% (€18000) Original capital.   Since the law states that these types of arrangements are taxed at 20% capital gains tax:

the tax bill would be 20% of €2000 (the capital gain element of the withdrawal), = €400.

So, in this example there would be a tax saving of €3600.  If you have a larger portfolio then proportionately the savings will be higher as well.

The above example is a simplified example of how you can save tax by investing in this type of arrangement.  It does not take into account specific circumstances or future changes in tax legislation which may take place after the time of writing.

If you have a portfolio in Italy or in another country and you are a tax resident of Italy, then this might be a way to save yourself a considerable amount of tax at a time when taxes are being increased in every other way.

by Gareth Horsfall. Find out more about Gareth Horsfall here.

Categories: Life Assurance