☏ +34 93 665 85 96  |  ✑ info@spectrum-ifa.com
Viewing posts from: November 2000

How do I deal with inflation?

By Andrew Lawford - Topics: Inflation, Italy
This article is published on: 18th January 2022

18.01.22

“The only function of economic forecasting is to make astrology respectable”
JK Galbraith

This opening quotation might seem somewhat defeatist. Surely economic forecasting, given the importance of the economy’s performance on our investments, must be necessary. The problem is that in order to have a useful piece of information, that information must be both important and knowable. There is no doubting that the economy’s future performance is important information for us investors, but to what extent can we know it?

At the risk of using excessive quotations, there is a good story from Kenneth Arrow, who subsequently won a Nobel Prize in Economics in 1972, about his time analysing long-range weather forecasts in World War II. He came to the conclusion that there was no difference between the forecasts and pure chance, and communicated this finding to his superiors. The following is the memorable reply that he received: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”

Which leads me on to inflation, without a doubt the economic piatto del giorno being served up in all current market analyses. Following a 2020 – 2021 in which it was decided, essentially on a global basis, to close down pretty much every non-essential activity and subsequently to apply massive amounts of government stimulus in the hopes of starting things back up again, we are finding a large number of anomalous economic effects. I imagine many people will have their own stories to tell, but my particular one is this: my son got to the point where he needed a new bicycle, having outgrown his previous one. A couple of years ago, this would have been as easy as going down to the local bike shop, choosing the model and swiping my credit card. This time, however, the bike shop told me that they hadn’t had a delivery of new bikes in two months due to logistics problems. They were, however, very happy to take my son’s old bike, a buyer for which was found in a matter of hours.

There have been plenty of variations on this theme in recent times, and it would appear that the process of economic restarting, with its attendant logistics issues, has fed into the current levels of inflation that are being reported. However, it seems unwise to extrapolate one observable trend and conclude that there is some inevitability about inflation remaining at its current high levels. This is the essential problem with economics: modelling extremely complicated systems such as economies is all but impossible: there are simply too many factors to take into consideration and the interactions between them all are unclear.

How do I deal with inflation

Of course, if we are investing, then it does seem like we have to take a view on macroeconomics and position ourselves accordingly. Financial newspapers exist to provide daily analysis of current trends and allow various experts to opine about their future path. There is little downside for those prepared to make forecasts: if they happen to be right about some particularly important phenomenon, they can trumpet for all time how they called the event. Their many incorrect calls, on the other hand, will be studiously forgotten about. If we extend this reasoning to well-known hedge fund managers, those who appear to have the Midas touch, we find ourselves subject to what is known as “survivorship bias”: for the few investors with truly long-term records, there are many others who have fallen by the wayside and whose investing results have been lost in the mists of time. This gives us the impression that there are gurus out there who know exactly what is going on in the economy, but it doesn’t correspond to the hard reality of investment: most truly successful investors don’t have a strong view on macroeconomic trends, because they understand that they are unknowable and that any market timing decisions based on forecasts are fraught with difficulty.

So if we can’t divine what is going to happen in the economy, can we know anything that is of use for protecting and growing our investments over the long-term? It turns out that the most important thing for investors is the mere fact of remaining invested. JPMorgan has shown that over the period from 1999 – 2018, the average return on the S&P500 index, the most important aggregate of US shares, was 5.6% p.a. However, your return would have been a paltry 2% p.a. if you had missed the 10 best days of that period, and you wouldn’t have made any money at all if you had missed the 20 best days. Keep in mind that those returns were produced notwithstanding several gut-wrenching market moves associated with the tech bubble bursting in 2000 (which led to three years of negative returns) and the financial crisis of 2008. If we zoom out even further, the annual returns for the US stock market in the post-war period have been positive in about 70% of the years. Those are odds that you want to take.

I should add as a proviso to the above that you need to have invested intelligently, and by that I mean choosing quality asset managers that are worthy, long-term stewards of your capital and who put your interests as clients before their own. It should, of course, be a given that financial professionals put their clients’ interests first, but the various scandals over the years have shown that one can never be complacent in this regard. My job as financial adviser is to help you to choose quality investments and to make sure that you understand the basic tenets of investment and stay with it for the long-term. If you’d like to discuss your own situation further, please don’t hesitate to get in touch for a free initial consultation.

With all of the above, I don’t mean to diminish the importance of inflation, but we need to keep it in its proper context: this isn’t a problem that has suddenly come out of the woodwork! It has been there all along, working quietly in the background to chisel away at your wealth. The graph below shows the effect of different levels of inflation over a number of time periods.

It should be clear that even modest levels of inflation can prove very pernicious – taking the example of a 2% inflation rate over a 20 year period, you will find that prices have risen almost 50%, and so if your capacity for generating income hasn’t risen commensurately, you will find yourself dedicating ever more of your resources to the bare necessities, leaving you less money available for discretionary expenditure. We are told that we have lived through a couple of decades of very low inflation, but I distinctly remember the prices of milk, fuel and train travel (between where I live and Milan) when I arrived in Italy in 2004, and the inflation rate based on these basic goods and services is in the region of 2 – 3% p.a. over the period 2004 – present day (the official value is about 1.3% p.a.). There is no need to get into a debate about how inflation is calculated – I fully recognise that some goods (like consumer electronics) have improved and become cheaper over this period, but I buy fuel for my car far more frequently than I buy a smartphone.

The effects of inflation on your economic well being often become clear only after a long period of time, so the best idea is to work out a plan right from the start to make sure that your expenses are going to be sustainable in the long-term. Doing this can be quite difficult however, as you need to factor in variable investment returns, withdrawal rates and inflation in order to see how your plan is likely to play out. Investing for a positive real return (a real return is adjusted for the effects of inflation) over time relies on taking a long-term view and, as with choosing the right investments, my role as financial adviser is to help you understand all the variables and to find a sustainable path for the future. If you worry about inflation, then you are right to do so, but I can help you in finding ways to protect yourself from its worst effects.

Italian financial adviser

Please also check out my latest podcast – dedicated to citizenship, visas and estate planning, available on SpotifyGoogle PodcastsApple Podcasts and Stitcher.

Italy – 300,000 tax disputes, trusts and 7% tax regime

By Andrew Lawford - Topics: Italy, Moving to Italy, Retiring to Italy, Tax in Italy, UK pensions in Italy
This article is published on: 12th October 2021

12.10.21

First, let’s start with some good news. It was recently announced that the number of outstanding tax disputes winding their tortuous way through the Italian courts had dipped below 300,000 for the first time. If it doesn’t sound like much to be proud of, consider that back in 1996 it was almost 10 times that number! It just goes to show how much things have already improved, and yet much still remains to be done if we compare this statistic with a similar-sized country like the UK, where there are fewer than 30,000 outstanding disputes. Considering that almost 50% of the disputes in the courts relate to amounts lower than €3,000, it should be easy to find ways to tidy the system up (Mr Draghi, we are awaiting your reforms with bated breath!).

Now let’s look at a couple of recent clarifications/consultations from the Agenzia delle Entrate (Agenzia) – I try to keep people updated on issues that may be of interest to them, with the goal being that of not ending up in the legion of 300,000 referred to in the paragraph above.

7% pensioners regime Italy

A recent ruling (interpello) from the Agenzia has offered some further clarity on the 7% tax regime. Technically, a ruling only applies to the individual who asked for it, but they are obviously indicative of the Agenzia’s thinking on the topic at hand. In this particular example, we have a US resident who is transferring residency to an eligible town in southern Italy (for more basic details on the regime, first have a look at this article). Their pension is in the form of withdrawals from a US IRA account under a SEPP regime (Substantial Equal Periodic Payments) which allows the individual to make periodic withdrawals from the account prior to their ordinary retirement age (which in this case would be 59 years old). After a long introductory disquisition on the subject, the Agenzia has clearly stated that this kind of pension is eligible, the main reason being that it derives from the working activities of the individual in question.

A couple of other points that are also clear from the ruling: 1) there is no minimum age requirement for the 7% regime and; 2) even one-off payments received upon the termination of a work contract could qualify, as long as these derive from pension funds accumulated for that specific purpose during the individual’s working life.

If you find yourself in a grey area, applying for a ruling is a great way to get clarity on your personal situation and is money well spent when considering the alternative of being audited at some point after you have opted into the regime.

7% pensioners regime Italy

Trust consultation document
Anyone who has listened to one of my early podcasts on the subject will know that trusts are a thorny issue for Italian residents – they are formally recognised, thanks to the fact that Italy ratified The Hague Trust Convention, which came into force in 1992 – but from there it has been a constant source of trouble, mainly relating to how they should be taxed. Anyone who has any kind of link with a trust should make sure that they get a working idea of its potential consequences from the Italian point of view. I say “potential”, because there isn’t a great deal of clarity on the subject. The only thing for sure is that the Agenzia is taking a greater interest in these structures – hence the recent publication of a consultation document that seeks to give a cohesive vision of trusts in the Italian context.

You can expect some changes before it becomes definitive, but I am summing up its main points in a series of questions you should be asking yourself (and your advisers) if you have any kind of connection to a trust.

Is the trust itself Italian resident?

  • The fact that a trust has been set up outside of Italy doesn’t mean that the Agenzia cannot consider it to be an Italian resident (the same is also true of company structures)
  • The consultation document indicates that the basic criteria upon which a trust will be considered resident in Italy are the location of its registered office, its centre of administration, or its principal activities
  • There is a simple presumption of Italian residency for any trust that has at least one settlor and one beneficiary resident in Italy
  • A presumption of Italian residency also exists when an Italian resident individual transfers assets to a trust set up in a non-white list country
  • An Italian-resident trust is taxed at IRES rates (Italian corporate taxation) regardless of when distributions are actually made to the beneficiaries

What kind of trust is it (regardless of its residency)?

  • The consultation document discusses two types of trust: “opaco” and “trasparente”, with the distinction essentially being whether or not the beneficiaries have the right to receive distributions from the trust (trasparente), or are only amongst those for whom it is a possibility, but not a right (opaco). In simpler terms, we might call the “opaco” a discretionary trust and the “trasparente” a naked, or transparent trust
  • If you are the beneficiary of a naked trust, essentially you will be taxed on a “look-through” basis, as if the trust didn’t exist. This will involve the potentially difficult process of reconciling the trust’s reporting to the Italian reporting requirements for individuals
  • If you are the beneficiary of a discretionary trust, you are likely to be taxed at financial income tax rates (26%) on any distributions

Is the trust set up in a tax haven or does it otherwise enjoy preferential tax treatment?

  • If a discretionary trust is set up in a tax haven, or otherwise happens to enjoy a preferential tax regime, the trust’s income is automatically attributed to its Italian beneficiaries, regardless of whether the trust has actually made a distribution. You could end up paying tax on amounts you haven’t actually received
  • This point follows the similar regime for companies set up in tax havens or enjoying low tax regimes

Gift/inheritance taxes

  • People often set trusts up as vehicles for estate planning. One main source of doubt over the years has been the moment at which Italian gift or inheritance taxes fall due. The doubt has been created by the fact that the Italian Supreme Court (Cassazione) has oscillated between two competing interpretations
  • The first interpretation is that taxes are due at the moment the trust is set up, and should be paid at appropriate rates considering the relationship between the settlor and the ultimate beneficiary. This approach was favoured by those who wanted to pay the taxes now under the relatively low Italian IHT regime, in the anticipation of higher taxes in the future
  • The second interpretation is that taxes are due at the moment of final distribution to the beneficiary concerned
  • Interestingly, both approaches have been applied in the Italian courts, but it seems that the second interpretation is destined to become the definitive one. This puts people who have already applied the first interpretation in something of an awkward position

Will I be subject to foreign assets declarations (IVAFE/IVIE) as a result of being considered “titolare effettivo” (beneficial owner) of the trust’s assets?

  • This is quite a complicated point and is intertwined with the fact that recent reforms have made Italian resident trusts subject to foreign asset declaration rules
  • In some circumstances, even the beneficiaries of foreign discretionary trusts may have to declare the assets held by the trust due to the rules relating to beneficial ownership
  • The penalties for non declaration are such that, if you find yourself in a grey area, you should probably make the declaration (which is a fairly difficult thing to do properly)

Don’t underestimate the level of sophistication that the Agenzia is reaching with its interpretations of trust instruments – they can and will dig into the nature of a trust in order to understand exactly how it works and increasingly they have the expertise to do so. If you do have a connection to a trust or are thinking about setting one up, now might be a good idea to have a chat and review your situation. There are a limited number of circumstances in which they might make sense (for example in terms of protecting vulnerable individuals), but in most other cases we find that there are easier and more “Italian-friendly” ways of reaching the goals people have with their trusts.

If any of the above has raised doubts or queries, I’m always happy to hear from people by e-mail, or even just drop me a WhatsApp message and we’ll organise a time to speak.

Reflecting on estate planning

By Andrew Lawford - Topics: Estate Planning, Inheritance Tax, Italy, Succession Planning
This article is published on: 24th August 2021

24.08.21

Could the oldest woman in the world have been a fraud?

Not many people will recognise the name Jeanne Calment, but she is the main character of this article and her story invites reflection, regardless of the truth of the various claims made about her.

First, let’s see who Jeanne Calment (probably) was: she was born in Arles, in the south of France, in 1875 and died in 1997 at the age of 122 years, 164 days: this happens to be the oldest age, as far as we know, of any human being ever to have lived. This is clearly remarkable – having been born at a time when the average life expectancy of a French woman was 45 years, she managed to outlive not only her own generation, but also a number of successive ones. It is worth noting that average life expectancy has been influenced greatly by the high rate of infant mortality in the past: in 1875 roughly 18% of babies in France died before their 1st birthdays – today it is less than 0.03% – so once you made it through your first year, your prospects were much better.

Of course, becoming really really old is the sort of thing that might get you into the Guinness Book of World Records, and may provoke a certain amount of interest from medical researchers concentrating on life extension, but how much else of interest can there be in the topic? Well, according to Norris McWhirter, one of the founders of the Guinness World Records (and as reported in the article linked below): “No single subject is more obscured by vanity, deceit, falsehood, and deliberate fraud than the extremes of human longevity.”

estate planning

It turns out that the case of Jeanne Calment is complicated by the possibility of her not being who she said she was. The accusation of fraud is based upon the idea that she actually died in 1934, the year in which Jeanne’s daughter Yvonne is supposed to have passed away. Jeanne’s family, so it is argued, decided to declare that the daughter had died, with Yvonne then playing the role of her mother Jeanne for the rest of her life. Yvonne was born in 1898, making her death at 99 years old in 1997, if the accusation is true, somewhat less remarkable.

What could possibly have motivated the family’s decision to switch places between mother and daughter? Look no further than those two certainties of life – death and taxes – for the answer. It is clearly quite difficult to cheat death, but as the Calment family was well-to-do, saving an estimated 250,000 francs in inheritance taxes (something close to €1M in today’s money) can’t have seemed like a bad idea. If this is true, then full marks for creativity – we are certainly well beyond the bounds of your average tax evasion scheme! The story gets even better, though, with the decision of Jeanne (or Yvonne?) to sell the life estate of her apartment to her notary in 1969, at the age of 94. The agreement allowed Jeanne to remain in the property and obliged the notary to make regular payments to her until receiving full title upon her death. This sort of agreement, also reasonably common in Italy (the nuda proprietà), is essentially a bet by the buyer on how long the life tenant is going to live for. In this case, Jeanne not only outlived the notary but enjoyed continued payments from his heirs as well, ultimately receiving more than twice the value of the property she sold. Talk about a bad bet!

inheritance tax

Reflecting on estate planning

What does the above have to teach us? Either that people will go to extreme lengths to save on their taxes, or that they like to dream up good stories on the topic. Certainly we should reflect on estate planning and wonder what might be coming down the line in terms of inheritance taxes in the reforms that will be forthcoming from the Draghi government over the coming months. Currently, assets passing from parent to child are taxed very lightly in Italy compared with other European countries, with a rate of 4% applied on the excess value over €1M per heir. The rates increase to a maximum of 8% with a zero threshold for an heir with no family connection to the deceased, so even in the current worst case scenario taxes are relatively low.* It is worth noting that gifts and inheritances are treated in the same way under Italian law, so it is possible to make a gift up to the threshold limit today without incurring taxes; subsequent amounts inherited would then be subject to the taxes applicable at that time, but a gift now would be made under the current rules that may well become less advantageous in the future. There are various other mechanisms available for efficient estate planning in Italy, the main one being life insurance wrappers: the amounts received by the beneficiary of a life insurance policy are not technically part of the deceased estate, as long as the policy itself is set up in the correct way.

The above constitutes a simple comment on estate planning in the Italian context, but every situation is different and I often engage with clients’ legal counsel to help make sure that the overall plan will work well in the various interested jurisdictions. If you are thinking about reviewing your estate planning in Italy or are considering moving here from abroad, it is never too early to start the discussion – feel free to send me an e-mail and we can organise a time to talk.

Where does this leave us in the case of Jeanne Calment? If you want to read the whole article, which is long but fascinating, the link is here. I won’t spoil the outcome, but I think the journalist’s ultimate conclusion is the right one. I do hope, however, that they never do the DNA testing suggested: the world is better with a bit of mystery every now and again.

* Inheritance taxes may also be due in other jurisdictions depending on the location of your assets and links to other countries.

The cryptocurrency revolution

By Andrew Lawford - Topics: Bitcoin, Blockchain, Cryptocurrency, investment diversification, Investment Risk, Italy
This article is published on: 29th July 2021

29.07.21

Hodling and the cryptocurrency revolution

Are you hodling? No, that’s not a typo – it is millennial-speak for what you do if you are a true believer in the cryptocurrency revolution. Look it up. I wouldn’t describe myself as old, but I’m certainly old enough not to be automatically in tune with what motivates millennials. However, you can hardly open a newspaper these days without some notable individual passing comment on cryptocurrencies, and they even seem to be going mainstream now that bitcoin has been made legal tender in El Salvador – you can buy residency there for 3 bitcoin. It seemed therefore like a good moment to try and get at least a vague understanding of what cryptocurrencies are, as I suspect that many of the readers of this newsletter will be as confused as I am on the topic, so let’s see what we can discover. I will be focussing particularly on bitcoin, as the main example of a cryptocurrency, but do be aware that bitcoin is only the most prominent out of the estimated 10,000+ cryptos out there.

Everything you don’t know about money, combined with everything you don’t know about technology

This was a tongue-in-cheek definition of cryptocurrencies that I heard not so long ago from an asset manager, but it kept coming back to me every time I saw cryptos mentioned in the press.

Once upon a time, “money” essentially meant some amount of precious metal, generally in the form of a coin which was easily recognisable. Then we evolved to a situation in which we used banknotes to represent an underlying amount of precious metal, and finally we arrived at where we are today, where any link with precious metals has been definitively severed in favour of fractional reserve banking and “fiat” currency controlled by sovereign states – the “fiat” is Latin, meaning “let it be done”, and is the essential expression of our concept of legal tender: something is money not because it has any intrinsic value, but because the law says it is. These fiat currencies rely on trust in the good economic management of the issuing countries, and we can all think of notable examples of where bad management has left fiat currencies broken. I have a 100 trillion dollar note issued by the Reserve Bank of Zimbabwe in my office as a reminder of the importance of sound currencies.

Cryptocurrency

Not many of us could properly explain a fiat currency system and the interactions between bank deposits, bank lending and central bank reserves and, as a result, many find it tempting to say that even major currencies like the US dollar and the euro have little intrinsic value due to the fact that their supply is essentially unlimited. To a certain extent, cryptocurrencies were born out of a lack of trust in fiat currencies (even the “good” ones) and the desire to make money something more regulated (not in the sense of having more government oversight, but rather of wanting precise rules and limitations on the amounts of currency in circulation). In order to be worth something, so the reasoning goes, the supply must be limited and it must be difficult to create – hence the parallels that are sometimes drawn between cryptocurrencies and precious metals.

A lump of gold sitting in a vault somewhere has value simply because we think it has value; up until the time that you find a practical use for that gold, its value is dictated by that vague idea that come (almost) what may, at least it will always be there. Not an amazingly intelligent argument, it must be said, but better than many things that finance has come up with over the years. The basic reason for abandoning the link between money and precious metals was that the supply of commodities like gold or silver were subject to vagaries that had little to do with the overall economic situation, so bullion failed to keep up with our economic growth.

Bitcoin in your investment portfolio

As far as bitcoin is concerned, it is very clear that scarcity is central to its functioning given that it has been set up to have a maximum number of 21 million units. As of today, there are roughly 18.7 million bitcoins that have been created, but the number effectively available for transactions is much lower, due to the fact that many people hodl, and also due to the fact that a large number of coins have been lost (I have read estimates of 20% of the total in existence). You see, if you have a bitcoin, you better make sure you keep hold of the codes that allow you to access it, because there is no “lost password” function if you don’t. Losing the codes is the digital equivalent of throwing your gold bars into the Mariana Trench; they don’t cease to exist, but you will find it all but impossible to recover them. It is worth noting that whilst the scarcity value of bitcoin may be beyond doubt, the fact there are so many other cryptocurrencies around should give pause for thought about the scarcity of the category as a whole.

The creation of bitcoin is one of the things that I struggle with the most – it is commonly called “mining”, in an evident attempt to draw a parallel with precious metals, even though the mining in the case of cryptocurrencies is entirely digital. Essentially, they are discovered by computers contributing to the distributed ledger that monitors all bitcoin transactions. The only explanation of bitcoin mining that has made some sense to me so far is to consider it in terms of a triple-entry accounting system: There are two parties who record a transaction and this is then sealed into bitcoin transaction records by a third party that verifies it through its mining activities (and receives a reward for doing so). Mining, in the world of bitcoin, is technically called a “proof of work” and allows a participant in the network to be rewarded by participating in the distributed ledger and crunching the enormously complicated numbers that guarantee the transactions that have been recorded. This ledger, also known as the blockchain, belongs to everyone and no-one, rather like the internet itself, and it exists in order to eliminate the risk of someone being able to spend the same bitcoin twice. No, I don’t really understand it either.

It is also said that bitcoins and their transactions are “immutable” – I suppose to the same extent that precious metals are immutable. But does this really make any sense? Aside from the apparent lack of ability to hack the blockchain today, can we really be confident that in a thousand (or a million!) years bitcoin will still be unhackable and attractive to a sufficiently large community of people? Perhaps this is more of a philosophical question than anything else, but us humans do get wrapped up in the idea that the big issues of today are the big issues for all time. I suspect our distant descendants, assuming the human race is lucky enough to survive, will become interested in many things beyond bitcoin or cryptocurrencies in general. In this context, the best parallel to draw is with technological innovation: today, not many people are interested in steam engines or dirigible balloons, once important technological developments, and the same may be true for bitcoin in a few decades. For bitcoin to enjoy any value at all, it is dependent on the bitcoin community continuing to support it through time. It would be highly unwise to think that nothing will ever come to supplant it, because human experience with other technologies suggests that better things are always on the horizon. The same cannot be said for precious metals, which may wax and wane in terms of community interest, but do not depend on community interest for their existence. My gold bar will still be there in a thousand years if it is kept safe, regardless of what people might think about it. What might happen to it over the course of a million years is a question I find rather difficult to ponder, but it’s probably fine for the next few thousand.

Market volatility

In all of this, the real evolution may be arriving shortly, and it is not to be found amongst the many new variations on the bitcoin theme that have come into existence. Many have looked upon cryptocurrencies as a way of thumbing one’s nose at traditional financial structures – no more central banks and traditional bank accounts for me please! Yet the governments of this world are not going to give up the privilege of being able to issue national currency without a fight, and it could be that they will try to beat the cryptos at their own game. Some cryptos, known as “stablecoins” are backed by a given fiat currency, but it has been suggested that the most appropriate issuers of such coins are the central banks themselves. One idea is that each of us could end up, as of right, with our own account at the central bank of the nation we live in. If this were to happen, then bank runs would no longer be an issue and commercial banks would have to reinvent their business models, at least in part. Presumably physical cash would become a thing of the past. This is not speculation on my part – the ECB is publicly discussing the benefits of digital coins and the Bank for International Settlements – the central banks’ central bank – has even commented that this is “a concept whose time has come.” The full BIS report is available here for anyone who is interested.

Much has also been said about the potential of the blockchain – essentially the network that runs bitcoin – to revolutionise everything from banking to contracts. We’ll just have to wait and see how all of that shakes out, but it is clear that there are numerous technologies being developed and brought to bear on finance and commerce and it’s by no means clear that blockchain technology is the only answer. In any case, even if the blockchain network is valuable, this says nothing about whether any given cryptocurrency that relies on it has value.

As I suppose must be obvious by now, my research for this article hasn’t convinced me that cryptocurrencies are a good place to speculate (please let’s not use the term “investment” in this context!) – and certainly I see no reason why investment in this sort of asset should supplant traditional assets in an investment portfolio. As boring as it may sound, what really counts in investment is not jumping on that latest bandwagon, but planning one’s affairs properly whilst having a disciplined approach and a long-term view.

As a final point, for any Italian residents, please also be aware that bitcoin investments and gains deriving therefrom are subject to declarations and taxation in Italy – you may think your cryptos are 100% anonymous, but I wouldn’t be betting on it.

Are you moving to Italy?

By Andrew Lawford - Topics: Italy, Moving to Italy
This article is published on: 16th June 2021

16.06.21

I hope you are enjoying the summer weather and the return to comparative normality – long may it last!

I wanted to let you know about a new podcast episode that has just been released. It is entitled “Brexit (and more…)”, so will be of particular interest to UK nationals residing or considering taking residency in Italy, but it also explores quite a few topics that will be more generally applicable.

As it’s quite a long episode, I thought it would be helpful to give you an index of topics covered and the approximate minute markers so that you can easily locate the sections that are of interest to you.

  • 1:28 – Working with a UK financial adviser as an Italian resident
  • 8:55 – Equivalency in financial services between UK and EU
  • 12:57 – Taxation of EU-domiciled managed funds vs UK-domiciled managed funds post-Brexit for Italian residents
  • 15:50 – Tax declarations in Italy for directly-held foreign financial investments
  • 18:15 – The €51,645.69 question – holding foreign currencies as an Italian resident
  • 21:38 – ISAs – what they mean in Italy
  • 23:42 – Quadro RW – why you need to declare the mere existence of your foreign assets (as well the income that derives from them). Common Reporting Standards and why you should assume that information is being exchanged automatically with the Italian tax authorities
  • 25:20 – The taxation of UK real estate as an Italian resident (rental income and wealth tax (from 28:20))
  • 33:00 – Thinking about real estate investments once you move to Italy
  • 35:15 – Capital gains tax on foreign property (with particular comment on the situation for UK property owners who are non-resident in the UK)
  • 38:15 – Tax-efficient investment wrappers – what they can do and how they need to be set up. Some comment on inheritance taxes in Italy
  • 43:44 – The 7% pensioners’ tax regime
  • 50:10 – Italy vs Italia – and why you should persevere if you want to move here
Italian financial adviser

Click on the above links to listen

Do you have investments in the UK?

By Andrew Lawford - Topics: Investments, Italy, Tax in Italy
This article is published on: 4th February 2021

04.02.21

Time for a closer look at foreign portfolios

In one of my articles last year I looked into the complexity of the taxation regime for the various types of investment income that can arise for an Italian resident. I would suggest that you read that article, or at least its section on funds, as background before continuing. In this article we are going to look in greater depth at the taxation of funds, or collective investment schemes (from now on I’ll refer to these simply as “collectives”). While this may seem a somewhat dry topic, it will be of particular concern to those who have investments in the UK, given that their tax treatment will be changing now that Brexit has come to pass. Equally, though, many people will have investments in collectives that they made in their countries of origin that do not pass muster in Italy, and these will bring less than desirable consequences from a taxation perspective.

Ufficio Complicazione Affari Semplici

Let’s first make it clear that there is nothing in Italian law that makes it illegal for an Italian resident to own certain kinds of foreign asset, but as many people find out when navigating the Italian system, the fact that you are allowed to do something doesn’t automatically mean that it will be easy. In fact, Italy has a mythical government office known as the Ufficio Complicazione Affari Semplici (the Office of Complicating Simple Matters – it even has its own Facebook page) which, if it actually existed, might well be one of the most efficient government entities in the country (I am joking, of course, but it does sometimes feel that way)!

tax in italy

Anyway, back to the main point of this article: there is an important distinction made in Italian tax law between EU domicile as against non-EU domicile for collectives.* In order to enjoy the basic 26% rate of taxation for financial income, collectives must either respect the UCITS regulations (i.e. be authorised under the EU law for collective investment undertakings), or, if non-UCITS, they must be domiciled in the EU or EEA, registered for distribution in Italy and managed by an EU licensed asset manager. These requirements will exclude almost all non-EU domiciled collectives, with UK collectives the most recent addition to the list (as from 1st January 2021). So what happens when you have invested in a collective that isn’t covered by EU rules? Any income generated will be taxed at your marginal income tax rates, which is likely to be penalising for all except those with limited incomes (the lowest income tax band is 23% in Italy).

Much has been made in the press of the fact that financial services were excluded from the Brexit agreement. Below is what this looks like in practice (the following is an excerpt from a letter sent by the fund manager Janus Henderson to investors in their UK domiciled funds):

“With effect from 1 January 2021, UK domiciled investment funds that had previously operated under the Undertakings for the Collective Investment in Transferable Securities (UCITS) regulations will cease to be classed as UCITS and will instead become “UK UCITS”. From the same date, UK domiciled Non-UCITS Retail Schemes (NURS) will cease to be classed as EU Alternative Investment Funds (AIFs) and instead will be classed as third country AIFs. Any UK domiciled Janus Henderson funds that were registered for marketing purposes in any EU 27 countries will no longer be registered and marketing of the funds will therefore cease. For the avoidance of doubt our “UK UCITS” and NURS will not be registered for marketing in the EU as third country AIFs.”

Also on the list for unfavourable tax treatment you will find any non-UCITS ETFs, which would include all of those listed in the US (remember that ETFs are simply collectives that trade on a stock exchange). It will also include holdings in Investment Trusts listed in the UK. To be fair, UK Investment Trusts have always been in an unusual situation – something I found out first hand a number of years ago after holding an Investment Trust through an Italian bank. I was amazed at the paperwork that arrived at year end relating to this holding, the income from which I was obliged to put in my tax return (to be taxed at marginal rates). At the time there was also a complicated distinction made between the variation of the fund’s NAV compared with the variation of the price of the shares that I had bought and sold – although I believe that particular distortion has now been resolved for listed funds like ETFs (every now and again something slips past the Office of Complicating Simple Matters).

USA Federal Bank

What about the US?
Any American readers should be particularly concerned, because they cannot hold EU collectives due to the arcane nature of US taxation, which makes compliance difficult even for non-resident US citizens.

You are unwise to hold EU collectives from a US point of view, and unwise to hold US collectives from an Italian point of view. So what to do? Do not despair: much will depend on your individual situation, but we can often help to improve substantially the overall tax efficiency and declaration burden relating to your portfolio.

The bottom line is that you should never assume that what works well in one country will work well in another, and especially not one like Italy that has government offices specialised in complicating matters!

If you would like to discuss your own situation then please get in touch. Our aim is to simplify complicated matters as much as possible whilst making sure that your assets are well managed, with a view to the long term. In this context, avoiding unnecessary tax exposure remains a key element of most successful investment strategies. With proper guidance in the process of portfolio construction, it is entirely possible both to enhance investment returns and reduce administrative complexity.

* Normally you can tell where a collective is domiciled by looking at the first two digits of its ISIN code (ISIN stands for International Securities Identification Number, a 12 digit alphanumeric code which almost all financial instruments have): IT will identify an Italian security, GB a UK security, LU a Luxembourg security and so on.

Banks, Bonds and Badwill

By Andrew Lawford - Topics: Banking, Italy
This article is published on: 13th December 2020

13.12.20

Today I’d like to explore the topic of Italian banking consolidation – but first I’d like to mention my new podcast episode, which features an interview with entrepreneur Andrew Meo, who walks us through his experience of starting a business in Italy – Milan based Rocket Espresso www.rocket-espresso.com. Even if you have no interest in starting a business in Italy, his story is a compelling one and gives us the chance to think more deeply about the prospects for the Italian economy. Check it out on iTunes, Spotify, Google Podcasts or Stitcher.

Now on to the banks
It probably hasn’t escaped your attention that there has recently been a new round of consolidation in the Italian banking market. It’s really no exaggeration to say that once Intesa Sanpaolo completes its takeover of UBI Banca and if, as seems likely, Unicredit ends up having the House of Horrors that is Monte dei Paschi di Siena foisted upon it (see below), that there will really only be 2 large banks in Italy. Of course, Italy has many, many banks – just look here at the list of members of Italian Banking Association, but in terms of concentration of assets, the situation is clear.*

Italian bank assets

* Please note that the Intesa – UBI takeover has yet to complete and the combination of Unicredit – MPS is currently only a rumour

Intesa, in particular, has been making the best of a bad situation over recent years, having taken on, for the sum of €1, the good parts of two failed banks from the Veneto region (Veneto Banca and Banca Popolare di Vicenza) in a deal that was breathtakingly good for them. Aside from being able to pick and choose only the best bits of the banks, they also received the following benefits (see the press release from June 2017):

  • A public cash contribution of €3.5bn to guarantee the stability of Intesa’s financial ratios;
  • A further public cash contribution of €1.285bn to cover “integration and rationalisation charges”;
  • Public guarantees of €1.5bn “to sterilise risks, obligations and claims” arising before the transfer to Intesa;
  • Full availability of deferred tax assets (roughly €2bn);
  • The right to give back certain higher-risk loans if these turn bad by the end of 2020

Nice work if you can get it!
The reality is that Intesa was able to call the shots in this deal, because Unicredit, the only other Italian bank theoretically able to take on the task, was still trying to sort out its own troubles with non-performing loans, having had to launch capital increases for €20bn or so in the period between 2012 – 2017 (a €13bn capital increase had just been completed at the time of the Intesa deal for the Veneto banks).

Moving on to the recent deal to acquire UBI Banca, we encounter the curious phenomenon of badwill, or “negative goodwill” as Intesa prefers to define it.

Intesa presentation

Intesa presentation re: UBI Banca acquisition – February 2020

Instinctively, we could define “goodwill” as that aspect of a business that defines the value it provides to its customers. In accounting terms, goodwill is an intangible asset that arises in an acquisition when the price paid is greater than the value of the net assets received. It follows from this that “badwill” arises when you get assets of a greater value than the price paid for them. Such is the story of Italian banking (and most banks in Europe, to be fair) – their assets simply aren’t perceived as having great value. In Italy, in particular, after a long period of struggling with non-performing loans, the market is worried that a fresh batch will be showing up over the coming years once the effects of COVID support have worn off.

Moving on to Unicredit, there was some hope that under its CEO of recent years, Jean Pierre Mustier, that the bank could become an Italian champion of consolidation in Europe. In particular, Mr Mustier’s old employer, Société Générale, was floated as a potential candidate for a tie-up, and certainly a far more presentable option than that of a domestic union with Monte dei Paschi di Siena, undoubtedly the ugliest girl at the dance of Italian banking consolidation. In recent weeks, Mr Mustier has decided to hand in his resignation after clashing with his Board of Directors, so it seems only to be a question of time before the unhappy couple announces their engagement.

All of this concentration of banking assets in two main groups leads to a number of considerations. Firstly, the unhealthy connection between bank balance sheets and Italian sovereign credit risk seems to be growing. Between them, Intesa-UBI and Unicredit-MPS hold about €175bn of Italian sovereign debt (as at 30/06/2020). The banks themselves have also become so large that they might not only be “too big to fail”, but also “too big to save” – assuming that the ultimate backstop is always an implicit government guarantee.

From our perspective as depositors, whilst we wait for the proposed EDIS (European Deposit Insurance Scheme), the best we have is the Italian FITD (Fondo Interbancario di Tutela dei Depositi), which does guarantee deposits up to €100,000, but is based on a system of mutual assistance between the banks – if one of the two giants were to stumble, the system may well struggle to make good on all claims.

All this brings to mind the wisdom of the following quotation from Mark Twain:
“I’m more concerned about the return of my money
than the return on my money”

It clearly makes sense to have a bank account in Italy if you are living here, and there are some good, low cost options out there. Many of you may already have the bulk of your financial assets in Italy and some of you are probably thinking seriously about moving more funds here, given that a number of UK banks will struggle (or even refuse) to service Italian residents after Brexit. However, there are also good reasons to maintain a substantial portion of your financial assets outside of Italy, and I can help you to understand all the options and eliminate the complications that arise from the tax declarations. Please feel free to get in touch if you’d like to learn more.

And with that, the only thing left to do is wish you all a pleasant and relaxing Christmas and New Year – with any luck, 2021 will be a substantial improvement on 2020 (admittedly a low bar to jump over!).

Investment income taxation in Italy

By Andrew Lawford - Topics: Investment income taxation in Italy, Investments, Italy, Tax, Tax in Italy
This article is published on: 5th November 2020

05.11.20

This should be easy, shouldn’t it? Everything gets taxed at 26% – dividends, interest and capital gains. However, for anyone who has delved into the world of Italian fiscal matters, it should be obvious that the words “easy”, “taxation” and “Italy” do not belong in the same sentence.

Let’s try and examine how it all works
Basically you have two main choices: do you want to keep all of your financial assets in Italy, or will you keep some, or all, of your assets outside of Italy? While it is beyond the scope of this article to look at the solidity of the Italian economy and its financial system, you may well be reluctant, with some cause, to move all of your assets here. Maintaining assets abroad as an Italian resident can be fraught with difficulties, but careful planning can mitigate almost entirely the issues that arise. Read on for further details.

Basically you have two main choices: do you want to keep all of your financial assets in Italy, or will you keep some, or all, of your assets outside of Italy? While it is beyond the scope of this article to look at the solidity of the Italian economy and its financial system, you may well be reluctant, with some cause, to move all of your assets here. Maintaining assets abroad as an Italian resident can be fraught with difficulties, but careful planning can mitigate almost entirely the issues that arise. Read on for further details.

Assets held in Italy:
Let’s start by looking at the situation for those assets held in Italy (i.e. in an account at an Italian financial institution):

For directly-held, unmanaged investments at an Italian bank or financial intermediary, the 26% rate will apply to income flows (e.g. dividends and coupons) at the time they are received and to capital gains at the time they are realised. This system is known as regime amministrato and it is generally the default position that most people will find themselves in when they open an account in Italy, unless they opt for a discretionary asset management service (see below). Under this system, the bank or other intermediary involved makes withholding payments on the client’s behalf and no further tax is due.

You can opt out of this system and elect to make your own declarations and tax payments (regime dichiarativo), however this is likely to be a sensible option only for someone who has assets spread over a number of different banks, as it is the only way to off-set gains realised in one bank with losses realised in another. The cost of doing this is that you will have to take responsibility for the correct declaration of all your investment income, which is no easy task. It will necessitate a lot of work on your part, as well as the need to find a local tax accountant willing and able to handle this aspect of your tax return.

If you decide to use a financial adviser to help with the choice of your investments in the above context, it is worth noting that any explicit cost of the service will attract Italian VAT at 22% (and if you are not paying an explicit cost, then you should look closely at the assets you are being advised to purchase – expensive, commission-paying funds are still very much alive in the Italian market). It is not possible to deduct the advise cost from your gross results before taxation is withheld.

The weird world of fund taxation:
One of the more perverse aspects of financial income taxation in Italy is the treatment of fund investments (basically any collective investment scheme, including ETFs). These will produce what is known as reddito di capitale when they generate dividends or are sold at a profit, but a reddito diverso when sold at a loss. What this means in practical terms is that in a portfolio containing only funds, you cannot off-set losses against gains. If you do accumulate losses through selling losing investments, you will need to generate gains that can be classified as redditi diversi in order to off-set the losses. This will likely involve investments in individual stocks and bonds, which may lead to an odd portfolio construction driven by tax considerations – generally not a good basis upon which to choose one’s investments.

Let’s turn now to directly-held, managed investments held with an Italian institution. In this case, taxation of 26% will be levied annually on any positive variation in the overall account value, with no distinction being made between the various sources of the income (this is known as the regime gestito). If the account suffers an overall decrease in value in the course of a given year, this loss can be carried forward and off-set against gains recorded over the following four years. Whilst this is a relatively simple arrangement from a tax perspective, it remains inefficient in the sense that it taxes you on unrealised returns (although at least the return is taxed net of fees).

It is worth noting that the asset management fees charged on this type of service attract Italian VAT at 22%, so an agreed cost of 1% per annum becomes a 1.22% cost for the client. Italian institutions will also generally favour investments in their “in house” managed funds, even when better (and cheaper) investments are available.

Assets held outside of Italy:
There is nothing to prevent you from holding assets outside of Italy, but you do need to go into such a situation with your eyes open. You will find yourself essentially in the same situation as the person who opts for the regime dichiarativo which I described above, together with the added aggravation of having to comply with the foreign asset declaration requirements (Quadro RW), which mean that you have to declare not only the income you derive from your financial assets, but also their value and any changes in their composition from year to year. If you’d like to have an idea of the complexity of making these declarations, get in touch with me and I will send you the instruction booklet for the 2020 Italian tax return (Fascicolo 2, the section which deals mostly with financial income and asset declarations, runs to 62 pages this year, and no, it is not available in English). You cannot opt to have a foreign, directly-held, discretionary managed account taxed as per the regime gestito above, because this is only possible for accounts held with Italian financial institutions. This means that any account will have to be broken down into its constituent elements and the tax calculated appropriately. Please also note that accounts which enjoy preferential tax treatment in a foreign jurisdiction will generally not carry any such benefits for an Italian resident.

Italian-compliant tax wrappers:
There is a solution which allows you to maintain foreign assets whilst removing 99% of the hassle described above. This involves using an Italian-compliant life insurance wrapper, issued from an EU jurisdiction. There are a number of other important benefits that accrue to this type of solution for an Italian resident, the two main ones being deferral of taxation until withdrawals are made (or death benefits paid) and total exemption from Italian inheritance taxes. I am reluctant to present comparative numbers in an article of this sort, but it should be clear that if the investments and costs are the same under the various scenarios examined, tax deferral will lead to a higher final investment value, and so should always be the preferred solution.

tax in italy

My goal with this article hasn’t been to make your head spin (although I can understand that this might have been its effect), but instead to make it clear that even apparently simple rules can hide a web of complexity which will ultimately lead to an inefficient outcome for the unwary investor. My goal is to cut through the complexity and make your life as simple as possible, whilst giving you access to quality underlying investments. Yes, it can be done, even in Italy.

Buying Property in Italy

By Andrew Lawford - Topics: Italy
This article is published on: 15th October 2020

15.10.20

If you’re reading this, you may well already own a property in Italy – in which case, you’ll know the ropes already.

But for anyone wanting to get serious about hunting for property in Italy, my latest podcast should be of interest. We cover not only the ins and outs of property transactions, but also look at how best to approach the task of finding your Italian home.

As usual, we conduct interviews with experts who offer their unique perspectives to help you to disentangle an otherwise confusing (and potentially insidious) process.

Please click on the above links to listen

Tax break for pensioners moving to Italy

By Andrew Lawford - Topics: Italy, Moving to Italy, Pensions, UK Pensions
This article is published on: 14th August 2020

14.08.20

Anyone like the sound of living in Italy and paying only 7% tax?

Generally speaking, if you are contemplating the move to Italy you will be thinking about many things, but saving on your tax probably isn’t one of them. So let me give you a nice surprise: if you are in the happy situation of being a pensioner considering moving to Italy, 7% tax on your income is possible, subject to a few rules, for the first 10 years of your residency in the bel paese.

This all came about in 2019’s budget and had the aim of encouraging people to move to underpopulated areas of Italy. Initially, the rules were that you had to take up residency in a town with fewer than 20,000 inhabitants in one of the following regions: Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardinia or Sicily. Subsequently, the criteria were extended to include towns in the regions of Lazio, Le Marche and Umbria that had suffered earthquake damage and which have fewer than 3,000 inhabitants.

Of course, being Italy, something had to be difficult in all of this, and indeed the law makes reference not to a list of towns but instead tells you to look at ISTAT data (ISTAT is the Italian statistical institute) for the population levels on 1st January in the year prior to when you first exercise the option.

Spectrum IFA Survey

Given the difficulty in finding out exactly which towns would be covered by this rule, I delved into the ISTAT data and also dug out the relevant references to earthquake-struck towns with fewer than 3,000 inhabitants in the other regions mentioned above. I have put all of this in an Excel file which gives a list of towns eligible for the

pensioners’ tax break in Italy divided by region and then further by province, so that you have a rough geographical guide as to the areas you could consider moving to Italy.

As I was sifting through the ISTAT data it suddenly dawned on me that if the cut-off is 20,000 inhabitants, then almost the whole of Southern Italy is eligible for this 7% regime, and you can include in that some truly delightful places such as Vieste in the Gargano (Puglia), or even the island of Pantelleria. This is possible because Italy is divided up into municipal areas that sometimes have more feline than human inhabitants. Obviously, if you are looking for raucous nightlife then you are likely to be disappointed by what is on offer, but if, on the other hand, you like the idea of not having too many people around, then you could do worse than the town of Castelverrino in Molise (population 102) or Carapelle Calvisio in Abruzzo (population 85). Perhaps one day you could even become mayor.

Flat Tax Regime

This new flat-tax regime comes amid a move by a number of European countries to attract pensioners to their shores. Portugal offered a period of exemption on income tax for foreigners (the benefits of which they are now reducing) and Greece has recently announced the intention to offer a 7% flat tax on foreign-source income for pensioners (I wonder where they got that idea from?), which is also promised for 10 years. There is some discussion about the fact that the EU is not generally well-disposed towards these preferential tax regimes, which could lead to them being phased out in a relatively short period of time – so for those looking to make the most of them, time could truly be of the essence.

tax in italy

The great thing is that the 7% rule applies not only to your pension income, but can be applied across the board to any foreign-source income and there is also a substantial reduction in the complexity of the tax declarations that must be made. There are further tax-planning opportunities in all of this, because much will depend on whether you are planning on being a short-term or long-term resident of Italy.

As always, the devil is in the detail as far as tax and residency planning is concerned, and the year of transition when you first establish residency in Italy is key to setting yourself up in the most efficient manner.

So if the above sounds interesting, please get in touch and I would be happy to send you the list of eligible towns and discuss how the rules of the regime apply to your situation.