Italy passes tax exemptions on Trusts for disabled persons
On the 25th of June 2016 in Italy the law 22 June 2016, no. 112 came into force whose subject is “Measures of assistance to people with severe disabilities without family support”.
The aim of the law is, under article 1, to promote well-being, social inclusion and full autonomy for people with disabilities. In particular, the law governs measures of care, treatment and protection in the best interests of persons with severe disabilities, not determined by natural ageing or diseases related to old age; without family support, as missing both parents or because they cannot provide proper parental support, as well as in view of the absence of family support, by gradually taking charge of the person concerned during the life of the parents themselves. The law is also called “After us” law.
The measures provided by law no. 112/16 are in addition to basic levels of care and to others measures of care and support provided by current legislation in favour of people with disabilities. Use of the measure is incentivized through the provision of tax exemptions, the use of trusts and similar instruments as well as insurance policies.
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In fact, the new law facilitates: gratuitous disbursements by citizens, setting up insurance policies as well as trusts and others similar instruments of allocation of funds in favour of disabled persons. In so doing, the law, in particular, exempts from inheritance and gifts tax (IHT), trusts in favour of people with severe disabilities (article 6).
Recipients of the law are people with “severe “disabilities. They are defined by article 3, par. 3, of law 5 of February 1992, no. 104. People with “severe” disabilities are those whose personal autonomy, related to age, requires a permanent care intervention, continuous and global. A trust for people whose disability is not “severe” will not be exempted by IHT.
To be exempted by IHT, a trust in favour of a person with severe disability must be set up by notary deed. The recognition of trusts in Italy depends on The Hague Convention 1 July 1985 on the law applicable to trusts and on their recognition (“Hague 30”). The Convention was ratified by Italy in 1989 (law 16 October 1989, no. 364) and comes into force on 1 January 1992. It contains a definition of trust in article 2 “For the purposes of this Convention”, which means that the definition is not properly identical to that of the English trust.
Italy recognizes only “express trusts” (“inter vivos” or “mortis causa” trusts) under article 3 of Hague 30. That is, trusts created voluntarily and evidenced in writing. Italian practitioners, since the coming into force of Hague 30, have explored the use of the convention to allow the creation of trusts in the absence of any foreign connecting factors except for the applicable law. This has led to the creation of the so-called “internal trust”, that is “A trust whose elements are all connected with Italy except for the applicable law, that is a law of a trust country”.
In an internal trust the settlor is Italian, the trustee is Italian, the subject matter is located in Italy, the beneficiaries are Italians. The Italian courts approved this sort of “experiment” and now the creation of internal trusts is very common in Italy. Statistically, the majority of internal trusts are governed by English Law of Trusts or by Trusts (Jersey)
Law 1984 but sometimes, professionals are not aware of the law applicable. The wrong choice of law applicable to the trust can in fact be critical.
Under article 6, par. 3, of the law no. 112/16, the application of tax exemptions are subordinated to a series of “conditions” that must be all included in the trust deed, provided by letters from a) to h) of article 6, par. 3.
The trust deed must:
a) identify clearly and unequivocally the persons involved (the trustees, the protector, the beneficiaries) and their respective roles;
b) describe the features and the specific needs of the person with severe disability, in favour of which the trusts is set up;
c) indicate the welfare activities necessary to ensure the care and satisfaction of needs of the disabled person, including activities aimed at reducing the risk of institutionalization of the same person;
d) identify the duties of the trustees regarding the plan of life and the well-being goals that must be promoted in favour of the disabled person;
e) indicate the duty of the trustees to account for their administration;
f) provide that the exclusive beneficiary of the trust is the disabled person;
g) provide that the trust fund is used exclusively for the realization of the needs of the disabled person;
h) identify the protector and the criteria for their replacement;
i) provide that the trust will (necessarily) terminate at the date of the death of the disabled person;
l) determine the beneficiaries of the residual trust fund.
If the trust deed contains all the above mentioned clauses, the transfer of the trust fund to the trustees is exempted from IHT (the settlor will pay only lump taxes of 200 euros each).
Yet, at the termination of the trust, the transfer of the residual trust fund to the (final) beneficiaries will be charged to IHT. As a result the exemption from IHT is only temporary.
Generally speaking, Italian IHT, in case of successions or gifts involving spouse and sons of the deceased or the donor, is extremely favourable, so that Italy may be defined as a sort of tax haven for IHT.
The threshold under which no IHT is due is extremely high indeed, amounting to € 1.000.000 for each beneficiary. Thus, if the deceased or donor had her spouse and two sons, the threshold amounts to € 3.000.000. As a result, most of successions and gifts are IHT-free.
If the value of the assets exceeds the threshold, the IHT treatment is nevertheless low, as the IHT due amounts just to 4% of the value exceeding the threshold itself. But, as before, this situation is quite rare, so successions and gifts in Italy are mostly tax-free.
The IHT law provides also for successions or gifts involving other relatives of the deceased or unrelated persons. If these persons are siblings of the deceased or donor the threshold is reduced to € 100.000 for each beneficiary and the IHT due, if assets exceed the threshold, is 6% on the whole value; if they are unrelated, no threshold is provided and the IHT is 8% on the whole value.
Yet, other types of taxes are due from the beneficiaries, but only with reference to immovables bequeathed to them. These taxes are due for the registration of immovables into the Land Registry and they amount to 3%, calculated and paid on the “fiscal” (thus not “market”) value of the immovables (the so-called “cadastral value”). As this value is usually 1/3 (or less) of the market value, also these taxes are low. Furthermore, if immovables may be classified as the beneficiary’s “first home”, just a fixed tax of € 400 is due.
As to the taxation of trusts, the main features of IHT treatment are the following:
- irrelevance of the trustee for IHT purposes;
- relevance of the relationship between “settlor-beneficiaries”;
- inter vivos trusts are treated as a “direct” gift to beneficiaries;
- the thresholds are applicable also to trusts, so the taxation is extremely favourable.
If the law no. 112/16 is applicable, no IHT taxes will be due immediately (as happens in – say – “ordinary” trusts), but only at the termination of the trust. The IHT tax due at the termination of the trust will be calculated on a tax base consisting of the value of the residual trust fund.
For further information and advice contact Daniele Muritano direct via his contact details below.
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