It is definitely not considered a curse, but it isn’t a gift either! What is it then? Can we classify it as a neutral event? Certainly not. Is it necessarily the case that a life insurance policy will lose its unique position within the wealth management toolbox?
These questions refer to the new Italian Law no. 190 of 23 December 2014, in force since 1 January 2015 (the “2015 Budget Law”) which, in relation to life insurance policies (including unit and index-linked policies), changes the tax regime applicable to the proceeds paid to beneficiaries in case of death of the life assured.
It should be noted that until 31 December 2014 there was full exemption from Italian income tax on death proceeds received by an Italian resident taxpayer. The 2015 Budget Law modifies this tax exemption so that death benefits paid out from 1 January 2015 will be subject to income tax by excluding the portion of the benefit strictly relating to the so called “demographic risk cover”.
Whilst the demographic risk cover will still be tax-exempt, the remaining gain exceeding the premium will be subject to income tax. It goes without saying that the income will be subject to withholding tax in the event that the insurance company has opted for the withholding tax regime – which Lombard International Assurance has done. Even if there is no reliable interpretation by the Italian lawmakers, ANIA circular Prot. 0037 clarifies that the death benefits for the beneficiary must be qualified as capital income. Therefore, due to the law changes in recent years, taxation will be applicable at differing rates (where appropriate):
- 12.5% on the portion of income accrued on the policy until 31 December 2011;
- 20% on the portion of income accrued on the policy between 1 January 2012 and 30 June 2014; and
- 26% on the portion of income accrued on the policy after 1 July 2014, except the income generated from underlying assets invested in Government Bonds, which remains subject to tax at 12.5% regardless of the accrual period.
In this respect, in the second quarter of 2015 Lombard International Assurance will be the first Luxembourg-based cross-border operator to launch the look-through taxation of funds, allowing detailed taxation according to the different tax rates applicable to Government Bond and other financial assets.
This client-oriented implementation aims to strengthen our service experience and is achieved following significant investment in technology and close cooperation with an Italian data delivery company.
It is worth mentioning that the 2015 Budget Law does not have an impact on the full exemption from inheritance tax which still remains applicable for death benefits. Therefore, life insurance policies continue to maintain their attractiveness due to the fact that no other similar products in Italy can offer such a combination of advantages.
On this point, we should highlight the Government’s intention to increase inheritance tax rates. There was already a legal initiative in this respect in 2014 and it is more than likely that inheritance tax rates will be increased. How this increase will manifest itself is, at the moment, only speculation. Last year an increase of 2% was discussed for each scale with a reduction of the tax-free threshold. If we make a comparison amongst EU countries, Italian inheritance tax rates are quite low and will remain low even if they are subject to an increase of 2%.
Taking into consideration the current trend of Italian tax jurisprudence on the risk of requalification, our view is that by eliminating the full exemption from taxation in the event of death, the risk that such products might be considered as a tool falling under abusive provisions is mitigated and, consequently, the life insurance policy becomes more robust and balanced.
Lombard International Assurance has reflected in practice on the intention of the Italian lawmakers by offering sophisticated and modular life cover options including Base Life Cover to the more incisive enhanced life cover and Wealth Life Cover. Lombard International Assurance’s reactivity in this area continues to demonstrate our experience and expertise as the global leader in wealth management using life assurance.