Italian financial crisis 2011: essential estate planning for Italian real estate investors

Italian financial crisis 2011: essential estate planning for Italian real estate investors



Partner Nick Metta advises on key estate planning actions for Italian property investors in light of current Italian economic situation.

After the resignation of Italian Prime minister Silvio Berlusconi on 12 November 2011, economist and former European Commissioner Mario Monti was appointed to replace him, tasked with assembling a new government composed of experts who must delineate and carry out a concrete plan to avert the collapse of the Italian economy.

In sharp contrast with Berlusconi, Monti was selected for being a technocrat, his financial acumen needed to guide the country through this severe economic downturn. American President Barak Obama, German Chancellor Angela Merkel, French President Nicolas Sarkozy and other world leaders are closely watching the measures taken by Monti and the new Italian government with the fear that, should their measures not be sufficient to stop the Italian economic slide, the third largest economy of Europe could pull the entire Eurozone into collapse as well, a scenario that would have devastating consequences for the global economy.

Under the pressure of such responsibility, the Monti government shall quickly call for severe fiscal measures to be taken, some of which are anticipated to be very unpopular. One measure currently under discussion is of significant interest for Italian property owners and investors. This measure is to reintroduce the property tax on all Italian properties used as a primary residence (in Italian this is termed ICI sulla prima casa”) and, given its substance, has a high probability of being put into action.

A further measure specifically of interest to Italian property owners, less discussed yet still likely, is the reintroduction of higher inheritance tax rates, whose implications for Italian property investors will be discussed here.

Taking a look at the recent history of the inheritance tax, one can see why new reforms are probable. The Italian inheritance tax rates were up to 60% until 2000 when the ruling Amato government reduced the rates to a maximum of 11%. The following year, Berlusconi was in power and his government proceeded to completely eliminate the inheritance tax. In 2006, the Prodi government reintroduced a light version of inheritance taxation which provides generous exemptions and low rates with a maximum of 11% when real estate is involved. This version remains in force today making the Italian inheritance tax system one of the lowest in Europe.

Therefore, given the current economic climate, it does not seem unreasonable to expect the Monti government to adjust the exemption thresholds and raise the tax rates. This measure would address some of Italy’s need for funds to repay the Italian public debt, which is currently 122%* of Italian gross domestic product (in Italian, “Prodotto Intorno Lordo” or  “PIL”).

At this stage there are no concrete elements to predict whether and which inheritance tax adjustments will be established. Since they are however probable, it is advisable for Italian property owners to prepare now for some version of these measures through proper estate planning strategies to legally minimize the effects of higher inheritance taxation later.

Estate planning strategies are of interest to those who already own an Italian property, as well as those who are planning to make an Italian real estate investment. Estate planning applies to both standard transactions and luxury property purchases. In both cases, it is beneficial to pre-emptively identify the possible scenarios to then delineate the legal strategies to execute under each scenario. This would allow the property owner to react quickly should the inheritance tax adjustments be made by the Italian government. By adopting the proper strategy, a property owner can legally avoid or minimize the impact of succession taxes, in whatever form they might be, at the time of succession.

The majority of non-Italian property owners and investors are in their fifties or older. When they buy their Italian property, they might already have an idea of who shall inherit the property upon their death, which in most cases is their children. It is however of concern to prepare properly for this and address the common questions of whether their home country will be applicable to the Italian property, what happens if no will is left (intestate succession), and how difficult and expensive it will be for the beneficiary to inherit the property within the Italian bureaucracy. These concerns should be addressed by both current Italian property owners and those who are looking to purchase a luxury villa on Lake Como or a small investment property in Le Marche.

A key to estate planning for investors who have not yet finalized their Italian property purchase is to legally involve the person who would be designated as the beneficiary in the owner’s will from the initial point of the transaction, at the time of purchase title deed. Under Italian law, there are different scenarios for purchase which enable one to avoid inheritance taxes at a later date. In particular, instead of a standard purchase structure, the investor could be designated to own the life interest only (in Italian, “usufrutto”) and the beneficiary to own the remainder interest (“nuda proprietà”). A key benefit to this option is that it does not create any extra costs at the time of completion and  dictates that there be an automatic transfer of full ownership to the beneficiary upon the life interest holder’s death. This structure would avoid the need to mention the property in a will and would exclude the application of any inheritance formality, procedure or tax at the time of succession.

For luxury property investors, given the elevated sum involved, it is often valuable to evaluate the possibility of purchasing the property through a corporate vehicle, i.e., a company, to hold either partial or full interest in the property. If the property is owned through a company, it can be transferred to other subjects either prior to or after the death of the company owners. A transfer of ownership in this manner is not subject to real estate transfer taxes and also benefits from the fact that the process entails fewer legal steps to carry out.

If the property has already been purchased, there are still options and strategies to put in place to avoid unnecessary succession formalities and taxes. One of the most effective and generally applicable options would be for the property owner to formally transfer the remainder interest in favor of the subject who would be designated as the beneficiary in the owner’s will. The transfer can be executed as adeed of donation (also known as gift deed – in Italian “atto di donazione”) or by means of a regular sale (“atto di compravendita”). Choosing between these options should be done with proper evaluation due to the consequences involved with each.

Purchasing an Italian property through a corporate vehicle is not a tax free procedure but, considering all factors involved, in most cases it would be more effective than processing the transfer through a traditional succession process, even in the unlikely event that the current inheritance taxes do not get increased. Should the Monti government use the inheritance tax as a tool to recuperate some of Italy’s much needed funds, a timely transfer of ownership would definitively avoid the risk of enduring higher succession taxes at a later date upon the death of the property owner. Furthermore, the Italian property remainder interest would have no tax impact for the inheritor’s income or property taxes in Italy, nor in the majority of the worldwide taxation systems.

To properly conduct estate planning strategies, personal situations along with objective and subjective factors must be evaluated under the perspective of the applicable Italian laws and regulations. To obtain the most effective results from estate planning, it is crucial to consult with an experienced Italian lawyer knowledgeable in Italian real estate law, corporate law, and tax law.

*Note: According to the Bank of Italy’s report of 15 November 2011, the 2011 Italian public debt has been fluctuating around 1.9 trillion euros. (ref:

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