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Using tax wrappers to structure your investments in a tax efficient manner as a resident of Italy
Italy is commonly regarded as a high-tax jurisdiction which makes it important to look for tax efficient ways to manage your financial planning. One popular solution for Italian residents with investment assets is to use a compliant tax wrapper as a vehicle for managing long-term investments.
These structures are typically used by high net worth Italians and are technically classed as unit-linked life assurance policies and sometimes known as Italian compliant bonds. In order to be compliant the insurance company act as a withholding agent for Italian taxes and report directly to the Italian tax authority.
Many who move to Italy assume that leaving investment assets in their country of origin is preferable to navigating and trusting the Italian banking system. However, there are a few important downsides to this approach.
We have identified three main problems in leaving your investments overseas as an Italian resident:
Firstly, you are responsible for reporting capital gains and dividends on each individual asset. These gains are declared via your annual return and the taxes must be paid whether you have withdrawn money from your investments or not.
Secondly, your overseas investments (including ISAs) are subject to IVAFE which is the wealth tax of 0.2% on overseas financial assets and must be paid annually.
The third problem is that the actual reporting process to declare capital gains and dividends is quite complicated. The only way to ensure avoiding mistakes is to work with a commercialista (accountant) which adds to costs in terms of both time and money.
Italian compliant tax wrappers can avoid these issues as well as allowing for significant tax benefits and a suitable vehicle to hold investments in a secure structure as an Italian resident.
Under this structure Italian resident policyholders are entitled to the following benefits:
- Deferred income and capital gains tax. Changes to assets within the portfolio are not chargeable events and thus taxes which would be withheld from a direct investment remain invested within the policy, while losses on other assets are offset against capital gains liabilities, providing what is known as gross roll up.
- No inheritance tax liability for beneficiaries.*
- Policy is considered an Italian financial asset and therefore not subject to IVAFE. Stamp duty does apply but is withheld and paid on your behalf when withdrawals are made.
- Tax efficient method of taking withdrawals, so can be used effectively to provide regular income in retirement.
- Convenience of no tax reporting obligations as the Insurance company acts as a tax withholding agent and completes the necessary reporting to the Italian authorities for client
- Security of assets – using a custodian banking arrangement the assets do not appear on the balance sheet of the insurance company or custodian bank and your assets remain intact in the case of insolvency.
- Investment flexibility – open architecture with ability to appoint overseas investment management firms
- Freedom to appoint beneficiaries who are not legal heirs and to determine the amounts available to beneficiaries (rather than standard Italian probate). Beneficiaries can also be changed at any time.
- Policy benefits cannot not be seized by the Italian authorities.
- Possibility to add additional insurance coverage on investment loses, to protect beneficiaries if used for inheritance tax planning.
For British nationals, the 2024 UK Autumn budget brought in changes to the inheritance tax (IHT) system, moving to a residency rather than domicile basis from April 2025. The result is that long term Italian residents who may have previously still come under the scope of UK IHT may be able to avoid UK IHT entirely. By using this type of tax wrapper they could also make themselves exempt from Italian IHT and avoid Italian probate on the assets held within the tax wrapper, simplifying matters greatly for their beneficiaries. This type of structure also works well for those returning to the UK. More information here.
The taxation table below shows the comparative benefits of using an Italian compliant insurance bond in comparison with directly held investments for an Italian resident.
Apart from tax efficiency there are other benefits to Italian compliant bonds. Both the convenience and security factors are important for Italian residents, where tax and banking arrangements can be both complicated and not as secure as this type of structure which offer a high level of investor protection.
The tax efficient manner in which regular withdrawals can be taken makes these structures a perfect solution for retirees who have built up invested assets which they intend to use for an income.
As the open architecture allows an investment manager to be appointed to manage the portfolio within the bond we look to UK and EU based managers to offer a wide range of options to our clients.
As a group we hold the appropriate regulatory statuses to advise on both insurance mediation via the Insurance Distribution Directive and give investment advice through the terms of our MiFID license. This is an important consideration and pertinent as part of your due diligence process. To understand more on how EU based advisors should be regulated an how it covers you, read our article here.
Finally, a word of warning when it comes to dealing with financial advisors who promote these products: unfortunately life insurance bonds are often used to disguise large commissions both by Italian banks and insurance brokers in Italy who sometimes market themselves as international financial advisers.
If there is a surrender penalty then there is a commission built into the structure. This commission results in much higher fees over the term of the policy (indemnified by the surrender penalty) which will significantly reduce your investment returns.
We are part of a fee-based group of EU regulated financial advisers. Transparency and fairness are paramount to our advice and we align our fees with UK standards meaning that there is no extra price to pay for being resident in Italy. We can setup structures with no penalties on surrender or withdrawal because no commissions are present, and as such we also offer them at a comparatively lower cost to other advisers, banks and investment firms in Italy.
Please get in touch via the contact form below for more information or to arrange a free initial consultation.