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Practical manual for Income Tax 2023.

Special assumptions

• Deferred capital insurance that is used to generate income

Regulations: Art. 25.3 a) 6 Law Income Tax

Life or disability insurance policies that provide benefits in the form of capital and said capital is used to establish life or temporary annuities will not be taxed at the time the contingency covered by the insurance occurs, but rather at the time the life or temporary annuities are established in accordance with the regime for these discussed below. To do this, the possibility of conversion must be included in the insurance contract and the capital must not be made available to the taxpayer by any means.

• Disability insurance whose beneficiary is the mortgage creditor

Regulations: Additional Provision fortieth Law IRPF

Income derived from the benefit for the contingency of disability covered by insurance will have the same tax treatment that would have corresponded if the beneficiary were the taxpayer himself, that is, they will be considered income from movable capital, when the following requirements are met:

  • That it be received by the taxpayer's mortgage creditor as its beneficiary.

  • That the taxpayer's mortgage creditor has the obligation to fully or partially amortize the taxpayer's mortgage debt.

  • That the mortgage creditor is a credit institution, or another entity that, in a professional manner, carries out the activity of granting mortgage loans or credits.

However, these incomes will in no case be subject to withholding.

Therefore, in this case, when the covered contingency occurs, the cancellation of the mortgage loan by an insurance company with which the taxpayer has taken out life insurance covering the risk of absolute disability, gives rise to a return on movable capital for the difference between the total amount of the insurance benefit corresponding to the credit institution (mortgage creditor) and the amount of the premiums paid in the current year. The amount of the remainder received by the taxpayer will also be considered as income from movable capital in accordance with article 25.3 a) of the Tax Law. 

Important: the condition for the benefits derived from life or disability insurance to be taxed in the IRPF is that the policyholder who contracts and pays the insurance premium (or the insured if the insurance is collective), and the beneficiary of the benefit coincide, except in this special case of insurance in which the beneficiary is the mortgage creditor; Otherwise, the income will normally be subject to Inheritance and Gift Tax.