Why a property sale can be tax-free in Italy but still generate a substantial UK Capital Gains Tax liability
The apartment had been in the family for years.
It was located in a small seaside town in southern Italy, a short walk from the beach. He had purchased it long before moving to the United Kingdom and used it mainly during the summer, occasionally allowing friends and relatives to stay there.
In recent years, he had also rented it out for a few weeks each season.
The property had increased considerably in value.
From an Italian perspective, the position initially appeared reassuring. The apartment had been owned for considerably more than five years and, subject to certain exceptions, Italy would not ordinarily tax the capital gain arising on its sale.
The owner therefore assumed that there was no particular urgency.
He could sell the apartment when the market was right, complete the transaction before an Italian notary and transfer the proceeds to the United Kingdom at a later date.
That assumption overlooked the UK tax position.
By the time the property was expected to be sold, he was UK resident. The apartment was therefore no longer merely an Italian asset governed by Italian tax rules. It was also a foreign asset held by a UK-resident individual.
The key issue was not whether Italy would tax the gain.
It was whether the disposal would take place before or after the end of his four-year foreign income and gains regime.
The FIG clock had already started
He became UK resident during the 2024/25 tax year, having previously been non-UK resident for more than ten consecutive tax years.
The new FIG regime commenced on 6 April 2025. However, the four-year qualifying period begins with the first year of UK residence, even where that year started before the new regime came into force.
His timeline was therefore:
- 2024/25: first year of UK residence, but before the FIG regime commenced;
- 2025/26: second year;
- 2026/27: third year; and
- 2027/28: fourth and final year.
He could potentially claim FIG relief for qualifying foreign income and gains arising from 6 April 2025 until 5 April 2028, but he did not have four future years of exemption.
One year of the statutory period had already elapsed.
HMRC’s published guidance confirms that the FIG regime applies for up to four consecutive UK-resident tax years and that years falling before 6 April 2025 still count when determining how much of the four-year period remains.
For the Italian apartment, this produced a potentially valuable but time-limited opportunity.
A qualifying gain arising by 5 April 2028 could potentially be relieved under the FIG regime.
A gain arising only a few days later could instead fall fully within the ordinary UK Capital Gains Tax rules.
“There is no capital gains tax in Italy” was only half the answer
Under the ordinary Italian rules, gains realised by an individual on the sale of a building are generally taxable where the property was acquired or constructed not more than five years before the sale.
The ordinary rule contains exceptions, including for inherited properties and, subject to the statutory conditions, properties used as the seller’s or the seller’s family’s main residence for most of the relevant ownership period.
Where a normal residential property has been owned for more than five years, the disposal will therefore frequently fall outside the Italian charge.
The apartment in this case had been acquired many years earlier. On the initial facts, no ordinary Italian capital gain was expected.
The UK does not follow the Italian five-year rule.
Once the owner was UK resident, the United Kingdom generally taxed his worldwide gains unless a specific exemption or relief applied. The fact that Italy did not tax the disposal did not make the gain disappear for UK purposes.
Indeed, the absence of Italian tax could make the UK exposure more significant.
There would be no Italian capital gains tax against which foreign tax credit relief could be claimed.
The UK–Italy Double Taxation Convention permits Italy to tax gains from Italian immovable property, but it does not give Italy an exclusive taxing right. The United Kingdom, as the state of residence, may also tax the gain under its domestic rules, subject to credit for qualifying Italian tax actually paid.
Where Italy charges nothing, the available credit is generally nothing.
The treaty prevents double taxation. It does not create an exemption where only the United Kingdom taxes the gain.
The Superbonus question could change the Italian result
The fact that the apartment had been held for more than five years was not, by itself, sufficient to conclude the Italian analysis.
A separate regime now applies to certain properties affected by Superbonus works.
For disposals occurring from 1 January 2024, a taxable Italian gain can arise on the first sale of a property that has benefited from qualifying Superbonus works where those works were completed not more than ten years before the disposal.
This rule can apply irrespective of how long the seller has owned the property and may be relevant even where the Superbonus works were undertaken through the condominium rather than directly inside the apartment.
Specific exclusions and computational rules apply, including exclusions for inherited properties and certain properties used as a main residence.
The treatment of the expenditure can also be restricted where the 110% Superbonus was enjoyed through a discount on the invoice or the transfer of the related tax credit.
For a seaside apartment situated in a condominium, the due-diligence questions therefore included:
- whether the building had undergone façade, energy-efficiency or seismic works;
- whether those works qualified for Superbonus;
- when the works were completed;
- who claimed the relief;
- whether the benefit was taken as a deduction, invoice discount or transferred credit; and
- whether the proposed sale would be the first sale following the works.
A property purchased fifteen years earlier could still generate an Italian taxable gain if recent Superbonus works brought it within the new ten-year rule.
The Italian and UK computations might then differ materially.
The apartment was not automatically a private residence
The owner referred to the apartment as “our family home in Italy”.
That description was emotionally understandable but not determinative for UK Capital Gains Tax purposes.
The property had been used during summer holidays and was occasionally occupied by relatives. For part of the year, it was rented to tourists.
A holiday property does not become an individual’s only or main residence merely because the family has a strong connection with it or spends several weeks there each year.
UK Private Residence Relief may be available for an overseas property, but the statutory requirements must be met. The property must genuinely have been occupied as the individual’s only or main residence, and additional conditions can apply for tax years in which the individual is not resident in the territory where the property is located, including the relevant occupation-day test.
If the apartment had previously been the owner’s genuine home before his move abroad, part of the gain might qualify for relief.
If it had always been a second home used principally for holidays, the position would be very different.
The following evidence became relevant:
- historic residence and registration records;
- utility consumption;
- correspondence and banking records;
- the location of the owner’s family and employment;
- the availability of other homes;
- the number and quality of days spent at the apartment; and
- the periods during which it was commercially let.
Calling the apartment a “casa di famiglia” was not enough.
The actual history of occupation had to be reconstructed.
The date of sale was not necessarily the date of the rogito
The proposed transaction followed the familiar Italian process.
A buyer would first make a written offer. The parties might then sign a preliminary sale contract, commonly referred to as the compromesso. A deposit would be paid and the final notarised deed, the rogito, would take place several weeks or months later.
From an Italian conveyancing perspective, the rogito is ordinarily the point at which the final transfer is completed.
For UK Capital Gains Tax purposes, however, it is not always safe to use the completion date.
Section 28 of the Taxation of Chargeable Gains Act 1992 generally provides that, where an asset is disposed of under an unconditional contract, the disposal is treated as taking place when the contract is made.
Where the contract is genuinely conditional, the disposal date is generally the date on which the relevant condition is satisfied.
HMRC also recognises that, where a foreign legal system governs the agreement, the nature and effect of the contract must be established under the applicable foreign law.
This created a potentially important distinction.
Assume that the parties signed a binding compromesso on 28 March 2028, with the rogito scheduled for 30 April 2028.
If the compromesso constituted the relevant unconditional contract of disposal for section 28 purposes, the UK gain might arise on 28 March and therefore fall within 2027/28.
If, however, the agreement remained subject to a genuine condition precedent, or did not yet constitute the relevant contract for the disposal of the property, the UK tax date might fall later.
The use of the word “compromesso” did not answer the question.
The actual drafting had to be reviewed, including:
- whether both parties were unconditionally obliged to proceed;
- whether mortgage approval remained outstanding;
- whether the buyer could withdraw following legal or technical searches;
- whether planning or cadastral irregularities had to be rectified;
- whether the seller had to obtain the release of a mortgage;
- whether the agreement was subject to the sale of another property;
- whether a statutory or contractual right of withdrawal remained; and
- the consequences under Italian law if either party failed to complete.
A preliminary agreement signed before 5 April could not automatically be treated as securing FIG relief.
Equally, it could be wrong to assume that the gain arose only when the parties attended the notary after 5 April.
The UK tax analysis had to be integrated into the Italian legal timetable.
A condition satisfied after 5 April could move the gain outside FIG
Consider a slightly different scenario.
The compromesso was signed on 25 March 2028, but the agreement was expressly conditional on the buyer obtaining mortgage approval.
The approval was issued on 9 April 2028.
If that approval represented a genuine condition precedent, section 28 could treat the disposal as occurring when the condition was satisfied.
The gain would therefore arise in the 2028/29 UK tax year.
By that point, the owner’s FIG period would have ended.
The fact that the parties had negotiated the transaction, agreed the price and signed a document before 5 April would not necessarily preserve the relief.
The tax cost of a short financing delay could be considerable.
This is why the correct planning instruction is not simply:
“Sign the compromesso before the end of the tax year.”
The correct instruction is:
“Determine when an unconditional contract of disposal will arise under the agreement and the applicable law, and ensure that the UK tax consequences are understood before the document is signed.”
The euro gain was not the UK gain
The owner had purchased the apartment for €180,000 and expected to sell it for approximately €480,000.
He therefore assumed that the gain was €300,000, less legal fees and renovation expenditure.
That was not necessarily the UK taxable gain.
UK Capital Gains Tax computations are prepared in sterling.
The acquisition cost must generally be translated into sterling using the exchange rate applicable when the property was acquired. Capital improvement expenditure must be translated using the rates applicable when each item of expenditure was incurred. Sale proceeds and disposal costs must then be translated using the rates applicable at the time of disposal.
It is not normally acceptable to calculate a net euro gain and convert that single figure into sterling at the sale-date exchange rate.
Currency movements can therefore create a materially different UK result.
The apartment might have increased by €300,000 in euro terms but produce a larger or smaller sterling gain depending on the exchange rates at the relevant dates.
The file needed to include:
- the original purchase deed;
- the purchase price and acquisition expenses;
- invoices for capital improvements;
- evidence distinguishing improvements from repairs;
- estate agency and notarial costs;
- any ownership transfers between family members; and
- consistent evidence of the historic exchange rates used.
Mortgage repayments did not form part of the capital gains calculation.
The outstanding loan reduced the cash ultimately received by the seller, but it did not ordinarily reduce the disposal proceeds or the economic gain on the property.
The summer rentals were a separate FIG issue
The seasonal lettings also required separate analysis.
Profits from an overseas property business are capable of constituting qualifying foreign income under the FIG regime.
During a qualifying FIG year, the owner may therefore be able to claim relief on properly calculated Italian rental profits.
The relevant amount is not simply the cash left after paying the mortgage.
Mortgage capital repayments are not deductible expenditure. Interest and finance costs are subject to their own statutory treatment. Personal use must be separated from commercial use, and expenditure may need to be apportioned where the apartment is available both to the family and to paying guests.
Italian tax paid on the rental income must also be coordinated with the UK return.
The FIG claim is annual and must identify the qualifying foreign income or gain for which relief is claimed. It does not operate automatically merely because the rent was received in Italy or retained in an Italian bank account.
Claiming FIG relief was still a choice
Even if the sale occurred during 2027/28, the gain would not simply vanish.
A valid FIG claim had to be made.
The amount of the qualifying foreign gain had to be identified and quantified in the UK tax return.
A claimant also loses the Capital Gains Tax annual exempt amount for that year, and qualifying foreign losses arising in a FIG-claim year may cease to be available.
For a substantial gain on the Italian apartment, the value of the relief might clearly outweigh those consequences.
Nevertheless, the entire tax-year position had to be modelled, including:
- other UK and foreign disposals;
- foreign capital losses;
- any available Private Residence Relief;
- Italian tax arising under the ordinary or Superbonus rules;
- the owner’s UK income position; and
- whether separate FIG claims were being made for foreign income.
The claim had to be based on the final computation, not merely on the sale price shown in the rogito.
The practical deadline was earlier than 5 April
The owner initially believed that he could decide during March 2028 whether to sell.
In practice, that would be too late.
Before the final FIG year ended, the advisers needed to:
- confirm the individual’s complete UK residence history;
- establish that 2027/28 was genuinely his final qualifying FIG year;
- review whether the apartment qualified as a foreign asset for FIG purposes;
- determine whether any period qualified for UK Private Residence Relief;
- investigate whether the apartment or condominium had benefited from Superbonus works;
- prepare an indicative Italian and UK capital gains computation;
- review the draft offer, compromesso and any conditions precedent;
- obtain Italian legal confirmation on the effect of the contractual documents;
- identify the date on which an unconditional disposal would arise for UK purposes; and
- coordinate the transaction date with the Italian notary, estate agent and buyer.
The commercial marketing process might itself take several months.
Title, planning and cadastral discrepancies are not unusual in Italian property transactions and can delay completion. A buyer may require mortgage finance. Existing mortgages may need to be discharged. Rights of pre-emption, succession issues or historical ownership transfers may also need to be resolved.
A transaction intended to fall within the final FIG year should therefore be planned well before the final winter, not during the last week of March.
The broader lesson
An Italian seaside apartment can appear fiscally straightforward.
It may have been owned for many years. Italy may impose no ordinary capital gains tax. The sale proceeds may remain in euros and may never be transferred to the United Kingdom.
None of those facts prevents a UK tax charge.
For a UK-resident owner, the decisive questions are:
- when the four-year FIG period began;
- whether any of that period remains;
- whether the property gain is a qualifying foreign gain;
- whether a FIG claim will be made;
- whether Private Residence Relief applies;
- whether the Italian Superbonus provisions create an unexpected Italian charge;
- when the disposal occurs under section 28; and
- how the gain is calculated in sterling.
The difference between a compromesso signed on 28 March and a condition satisfied on 8 April could determine whether a substantial gain is relieved or taxable in the United Kingdom.
The absence of Italian tax is not the end of the analysis.
In many cases, it is the reason why the UK analysis matters even more.
How Vectigalis Tax can assist
Vectigalis Tax advises UK residents holding Italian and other overseas properties on the application of the four-year FIG regime, UK Capital Gains Tax, Private Residence Relief and double-taxation relief.
Our work includes reviewing UK residence histories, identifying the final FIG year, analysing Italian sale documentation, coordinating with Italian commercialisti, lawyers and notaries, reviewing Superbonus exposure, calculating gains in sterling and preparing the technical analysis required to support a FIG claim.
Where a sale is being considered close to the end of the FIG period, the UK tax analysis should be completed before the proposta, compromesso or final sale documentation is signed.
For a confidential discussion, please contact:
Vectigalis Tax