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Residents of Italy with UK Pensions

If you are a resident of Italy and your pension remains in the UK, your pension may be subject to certain tax obligations such as the UK inheritance tax for lump sum payments. Fortunately it is possible to transfer your pension to another country and eliminate many of these obligations and liabilities by taking advantage of the HMRC’s Qualifying Recognised Overseas Pension Scheme.

How Your Pension Will Be Taxed in the UK

Pension payments in the UK are taxed as earned income in most cases. Under the current rules established in 2006, all types of approved schemes have the same tax treatment as registered pension schemes. This includes small self-administered schemes, personal pensions, self-invested pension plans, and occupational schemes.

Even if you are not a UK resident, you will be taxed on income that originates in the UK, such as a UK-based pension. UK pension payments are taxed at the individual’s UK marginal tax rate. Currently UK income is taxed up to 45% at the top rate. Some countries have Double Tax Agreements, or DTAs, with the UK. If you are a resident of one of these countries, such as Italy, you will only be taxed in your residing country except under certain circumstances.

UK Inheritance Taxes IHT

Lump sum payments out of pension plans after death are no longer taxed if the dependants are under 75 years of age, as specified by new rules in 2011. However, there are still many situations when pension payments will be subject to UK inheritance tax or other taxes.

  • If the dependant is 75 years of age or older, lump sums will be taxed at 55%. Lump sums paid after draw-down has started are also taxed at the same rate. In either situation, there is no further inheritance tax liability after the 55% has been paid.
  • Draw-downs received by the dependant after 75 years of age may be subject to a 40% inheritance tax if they are not spent before death.
  • If the death occurred before age 75, and no draw-downs or lump sums had been withdrawn previously, the lump sums after death are not subject to tax.

Double Tax Agreement between the UK and Italy

The UK has signed a DTA with Italy. Regarding pensions, this ensures that pension payments and similar remuneration paid in consideration of past employment will only be taxable as income in Italy if the recipient is a resident of Italy and the UK. The income will not be taxed in both countries. This also applies to any annuity payment.

There is an important distinction with pensions not paid in consideration of past employment. Typically, they will only be taxable in Italy under the Other Income Article. However, if the payments are classified as income paid out of trusts, then they may be taxed by the UK as well. Government service pensions have different rules and provisions.

Transfers to Other Jurisdictions under Qualifying Recognised Overseas Pension Scheme (QROPS)

In order to better protect your pension payments from income tax as well as inheritance tax, you may decide to take advantage of QROPs and transfer your pension to another jurisdiction. Both Malta and Gibraltar are attractive choices because they offer very favourable terms.

Pension Plans Transferred to Malta under QROPs

There is a Double Tax Agreement between Italy and Malta, so pensions that are paid in consideration of past employment are only taxable in the country where the recipient has residence. This also applies to similar remuneration payments and annuities.

Currently, Maltese tax policy does not consider pensions transferred under QROPS as being “paid in consideration of past employment;” however, typically these pensions will still only be taxable in Italy under the Other Income Article. Social insurance pensions and Government Service pensions have different rules and provisions. There are several advantages to transferring your pension to Malta under the QROPS regime:

  • Payments Not Subject to UK Income Tax
  • No Inheritance Tax in Malta
  • Not Subject to UK Inheritance Tax
  • Not Subject to the 55% Tax for Lump Sum Payments

There are two important exceptions. Obviously, protection from UK income tax only applies if you are not a UK resident, and are instead a resident of Italy. In addition, the 55% tax on lump sum payments after death will still apply if you have been a UK resident in the 5 years before the payment.

Pension Plans Transferred to Gibraltar under QROPS

There is no Double Tax Agreement between Italy and Gibraltar, so pension payments would be taxed at the current rate of 2.5% in Gibraltar and the appropriate rate in Italy. However, the Italian Tax Code specifies that unilateral foreign tax credit relief would be available for the Gibraltar taxes paid on income. The advantages to transferring a UK pension to Gibraltar include:

  • Payments Not Subject to UK Income Tax
  • No Inheritance Tax in Gibraltar
  • Not Subject to UK Inheritance Tax
  • Not Subject to the 55% Tax for Lump Sum Payments

Similar to the transfer of pension to Malta, these protections only exist if the individual is not a UK resident. The lump sum payments are only protected if the individual has not been a UK resident in the five years before the payment.

Income Tax Rules for Italian Residents and Italian Source Income

Residents of Italy are taxed on their global income. A person is considered a tax resident of Italy if he is registered in the Italian Civil Registry or if he has been residing in Italy for more than half of the fiscal year.

Italy taxes personal income at progressive rates, with the top rate reaching 43% of income. In addition, individuals may have to pay municipal and regional taxes that can reach up to 2.5% of income. A 3% solidarity tax is charged on income that is greater than €300,000.

Non-residents are only taxed on income originating from a source in Italy. Non-residents are not taxed on foreign pensions except when it is paid by an Italian resident or the State.

UK Pensions and Other Foreign Pension Income

In general, only residents of Italy will be taxed on foreign pension payments. Recipients of foreign pension income are expected to declare it on the Italian Annual Tax Return in the employment and associate income section. This income is taxed at the same progressive rates as other types of income.

Double Tax Agreements

There are 90 double tax agreements signed between Italy and other countries. This includes Malta and the UK. There is not DTA between Italy and Gibraltar, so pension income will be taxed at 2.5%, but the Italian Tax Code provides unilateral tax relief in cases of double taxation arising from foreign income.

Wealth Taxes in Italy

In Italy, some foreign assets are subject to wealth taxes. Foreign financial assets are subject to a 0.2% tax on market value under the Wealth Tax on Financial Assets (IVAFE). However, complimentary pension are not subject to IVAFE.

Although foreign pensions are not subject to wealth taxation, residents are required to disclose information regarding foreign assets under the Financial Monitoring Regime. This regime requires residents to declare foreign held assets with their annual tax return. Complimentary pension schemes that are held overseas are subject to the Financial Monitoring Regime and must be declared to avoid penalty.

Inheritance and Estate Taxes

Italy has a number of inheritance, estate, and gift taxes. Assets are subject to the Italian Inheritance and Gift tax if one of the following two conditions is met:

  • The Individual Providing the Inheritance/Gift is an Italian Resident
  • The Assets are Located in Italy

The tax rate paid by the recipient is determined by his relation to the provider of the gift, and the rate can be between 4-8%. Surviving spouses and children do not have to pay tax if the inheritance or gift is under €1 million.

Why You Should Transfer UK Pensions under QROPS Regime

If you do not transfer your pension to another jurisdiction, it will be subject to the 55% lump sum charge as part of UK Inheritance Tax. Under the DTA, you will not have to pay UK income tax on pension payments, but will have to pay income tax in Italy at progressive rates up to 43%, not including municipal and regional taxes. Wealth taxes would not apply to pension funds, but there are disclosure requirements as part of the Financial Monitoring Regime.

Transferring your UK pension to Malta or Gibraltar will protect it from the 55% lump sum charge levied by the UK tax authorities. The pension income will still be subject to income tax in Italy with rates up to 43% not including additional municipal and regional taxes. Italian residents also have to follow additional reporting requirements for the foreign pension, but wealth taxes would not apply.

Remember that although Malta has a DTA with Italy, Gibraltar does not, so your pension income would be taxed in Gibraltar at 2.5%. However, you can receive unilateral foreign tax credit relief from the Italian tax authorities to compensate for the double taxation. In the case of non-residents remitting their pension to Italy, the payments will not be taxable by Italian income tax, but will be subject to a 35% tax by Malta.

Though the QROPS regime will protect your pension from the 55% lump sum tax, this only applies to individuals who were not UK residents in the five years prior to death or payment.

Changes to UK Lump Sum Payment Charge

Taking effect on April 6, 2015, the 55% lump sum payment charge will be lower to 45%. If death occurs before the age of 75, the lump sum payments will not be subject to the tax.

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