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Those who reside in Italy and own real estate properties abroad, whether located in EU or non-EU countries, are subject to a wealth tax on foreign immovable properties (Imposta sugli immobili situati all'estero, 'IVIE'), levied on an annual basis at a rate of 0.76% (subject to limited exceptions).
IVIE was introduced in 2012 to 'capture' the ownership of foreign assets by Italian residents and extract tax revenues for the state coffers, along the lines of what already happens with the Italian tax IMU in relation to real estate located in Italy.
The taxable base for IMU is the cadastral value of the immovable property. Therefore, since IVIE came into force, there has been a need to identify the correct tax base for the taxation of foreign real estate properties. The position, which was taken almost immediately, is based on the key pillars of European law, such as the free movement of goods and capital. Therefore, for immovable properties located in European Member States or in countries within the European Economic Area (EEA), the Italian Tax Authority has specified that the chargeable value for IVIE purposes is primarily the 'cadastral' value, as determined and revalued in the country where the property is located. For real estate located in non-EU/EEA countries, on the other hand, the chargeable value is determined by reference to the purchase price or the cost resulting from contracts and, failing that, by reference to the market value.
"As anyone who has purchased a UK property knows, the so-called 'cadastral value' does not exist in the UK"
As anyone who has purchased a UK property knows, the so-called 'cadastral value' does not exist in the UK. Taxes (on purchase, inheritance, etc.) are calculated on the basis of the market value at the time of calculation. However, following a specific request of clarification, the Tax Authority, in order to address the need to maintain uniformity of treatment within the countries of the European Union, has identified the value attributed to UK properties for the purposes of calculating the Council Tax (the municipal tax on dwellings) as a value that could serve as a taxable base. The Council Tax is levied on the basis of tax bands attributed to residential properties, and varies from city to city and district to district.
Now, if the cadastral value of an Italian property does not reflect its market value at all, the Council Tax band value of a UK property is about as far from its actual market value as you can get, especially in London and the major cities. The Council Tax bands in England are still fixed at 1991 property values (and 2003 in Wales). By way of example, a property currently for sale in the London Borough of Kensington and Chelsea at an asking price of £3,250,000 falls within Council Tax band G, whose median value (taken as a reference by the Tax Authority) is £240,000.
Until 31 December 2020, the IVIE due on this property would therefore have been £1,824 per year (to be converted into Euros).
One of the various implications, more or less unexpected, of Brexit, resulting from the exit of the UK from the customs and tax territory of the European Union, affects precisely the pockets of property owners on the Island. Indeed, the Tax Authority, in the context of Telefisco 2021 has confirmed that from 1 January 2021 the chargeable value for IVIE purposes in respect of UK real estate properties will no longer be determined on the basis of the favourable value of the Council Tax band, but by reference to the general principle based on the purchase price or the cost resulting from contracts (and, absent such information, by reference to the market value).
"Suddenly, the Italian tax cost of the London investment rises to around £24,700, an overnight increase of 1,254%!"
Suddenly, the Italian tax cost of the London investment rises to around £24,700, an overnight increase of 1,254%! Not to mention that the profitability of the investment has most likely dropped in the last 12-18 months, due to the ongoing global pandemic and the consequent inability to travel internationally and plan holidays and stays.
This is certainly a bad surprise for all investors and, by extension, for the attractiveness of the UK property market, which has never suffered in Italy. Hence, it will come as no surprise if the issue will be raised again and discussed in more detail, and hopefully reconsidered, given the impact on taxpayers' pockets.
Originally Published 10 March, 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.