Although Brexit has brought about several changes in the way British citizens stay in Europe, owners of homes or property in Italy can breathe a sigh of relief. Brexit has not changed the way in which the property of British citizens located in Italy is taxed.

Since 1990, when the double taxation treaty between Italy and the UK came into force, immovable property has been taxed exclusively in the state where the property is located.

Before getting to the heart of the taxation of property located in Italy, we analyse the changes that have taken place following Brexit, on the movements and time limits of residence in Italy.

Limits to stays in Italy

European citizens have the freedom to move, without any time limit, and must only pay attention to the days spent in Italy in order to not gain residence status. Since 1 January 2021, this is no longer possible for UK citizens as they are treated as non-EU citizens and therefore, the procedures set out in the Consolidated Immigration Act (Legislative Decree 286/1998) apply.

This means that Her Majesty’s nationals staying in Italy for periods of less than 90 days (within a total period of 180 days) do not need an entry visa. For longer stays and/or to carry out work activities in Italy, it will be necessary to obtain:

• a work authorisation;
• a work visa from the Italian Embassy in the UK;
• a declaration of presence at the competent Territorial Police Headquarters; and
• a residence permit in Italy.

Finally, entry into Italy for reasons of subordinate work, including seasonal work and self-employment, must take place within the entry quotas that are periodically issued by the President of the Council of Ministers.

For particular categories of workers (for example, managers or highly specialised personnel of companies having their headquarters or branches in Italy, etc), the entry of non-EU citizens for subordinate work is allowed outside the quotas established by the flow decrees.

In addition to the above, according to Articles 18 and 19 of the Withdrawal Agreement between the UK and the EU, British citizens, and their family members, who are registered at the registry office of an Italian municipality (and therefore in possession of a certificate of residence, on 31 December 2020) can apply for an electronic residence document at the Police Headquarters of their residence from 1 January 2021.

Types of property in Italy

Main residence

A person residing in Italy who has their registered residence or domicile in a property that they own may define this property as their ‘main home’.

The concept of principal residence is very important in the Italian tax system because it exempts the principal residence from the payment of property taxes (IMU) and direct taxes (IRPEF).

Available property in Italy

Available property is defined as a property left at the free disposal of the owner because no rental contract has been registered for it.

This property will produce a tax liability in Italy (IMU). The owner does not have to submit a tax return in Italy when paying IMU. The IMU rate due is set by the individual Italian municipalities each year.

Calculation of IMU taxable base: real estate cadastral income revalued by 5%, multiplied by the coefficient attributed to each cadastral category. Box 1 (see below) contains some of the main cadastral categories and their coefficients for calculating IMU.

Rental property in Italy

Property located in Italy and rented out is subject to:

• direct taxation (IRPEF or cedolare secca);
• indirect taxation (stamp duty and registration tax); and
• property taxation (IMU).

The owner of the rented property can choose whether to apply ordinary taxation (IRPEF) or substitute taxation (cedolare secca) to the rental income.

Rental income taxed under the IRPEF rules means adding this income to any other income taxable in Italy of the foreign owner of the property to determine the IRPEF taxable income.

The taxable income (reduced by 5%) is then subject to tax according to the various brackets (see Box 2).

In practice, assuming the landlord has no other income to be taxed with IRPEF in Italy, a rental income of €10,000 per year would give rise to taxable income of €9,500, taxed at a rate of 23%.

Instead of the ordinary IRPEF taxation, the person residing abroad can choose to apply the substitute cedolare secca taxation. This choice must be made either when entering into a lease contract, or on one of the annual renewals.

The cedolare secca is a tax in lieu of IRPEF, registration tax and stamp duty.By choosing this method of taxation, the owner is taxed on 100% of the rental income in Italy, but at a lower rate than IRPEF. The rate is 21% if it is a ‘free lease’ or 10% in the case of a rental with an ‘agreed lease’.

In the previous example, for a rent of €10,000, the tax rate will be either 21% or 10%, depending on the type of lease.

Indirect taxes on rented property

Rental contracts subject to IRPEF taxation give rise to the payment of indirect taxes relating to the registration of the contract itself:

• 2% of the annual rent as registration tax (min €67);
• €16 for every four pages (or each 100 rows) as stamp duty.

By contrast, those who choose the cedolare secca taxation system are exempt from paying these taxes.

Tourist tax

Tourist tax was reintroduced in 2011.

This is levied on those who do not live in Italy and who spend the night in accommodation located in Italy.

The tax varies from municipality to municipality, depending on the type and category of accommodation.

Each municipality can decide whether or not to apply the tax, for how many days, providing possible exemptions to the payment of the tax and categories of totally free guests.

Deductions for building renovations

Property owners, both residents and non-residents, can benefit from deductions for renovation expenses if they are subject to personal income tax (IRPEF). The rates of deduction are 50%, 65% and 110%.

The basic requirement to benefit from the deduction is, of course, to be the owner of the property, or to be the holder of the real/personal rights of benefit on the property being renovated. The owner must also prove that they have incurred the expenses by means of a bank transfer, in a format suitable for ‘building renovation’ payments.

Finally, the owner benefiting from the deductions must keep the invoices in their name for the work carried out on the property.

Capital gains

The owner of a property in Italy who sells it for consideration may be subject to taxation on the capital gain.

The seller can ask the notary to apply a substitute tax of 26% instead of the progressive IRPEF tax.

The owner will only be taxed on the capital gain if:

• the property has been sold for a consideration (ie, by sale, exchange, contribution to a company);
• the property has been sold within five years of its purchase or construction. The legislator’s aim is to tax speculative intent; and
• it has not been used as the principal residence of the transferor or of their family members in the case of urban property units.

Inheritance taxes

Persons who inherit real estate and rights in rem in immovable property are obliged to file a declaration of inheritance and pay mortgage and cadastral taxes.

Mortgage and cadastral taxes amount to 2% and 1% of the value of the property, with a minimum payment of €200 for each tax.

Mortgage and cadastral taxes come to a fixed amount of €200 for each tax when the beneficiary qualifies for the first home relief.

About the author

Andrea Matera, ACA, Owner of Studio Andrea Matera in Genova and Rapallo, Italy