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Practical manual for Income Tax 2023.

Transitional regime for the reduction of life insurance contracts concluded before December 31, 1994

Note: example of the application of transitional regime is included in the following section.

Regulations: Fourth transitional provision Law IRPF and art. 93.5 Regulation IRPF

Pursuant to the repealed Law 18/1991, of the Personal Income Tax , the benefits derived from life insurance contracts generated increases or decreases in assets (except those arising from capitalization operations and those insurance contracts that did not incorporate the minimum risk and duration component determined in article 9 of the Personal Income Tax Regulation in force at that time) and these increases and decreases were subject to the reduction percentages established in the eighth transitional provision of the aforementioned Law 18/1991.

With the entry into force on January 1, 1999 of Law 40/1998, of December 9, this tax treatment disappears, but a transitional regime is introduced that maintains the application of these reduction percentages to the part of the income corresponding to premiums paid before December 31, 1994. This transitional regime has been maintained in the current Personal Income Tax Law in the terms that we will discuss below.

When deferred capital is received, the portion of the total net income corresponding to premiums paid before December 31, 1994, which was generated before January 20, 2006 , may be reduced as follows:

1. Calculation of total net return

The portion of the total net income obtained that corresponds to each of the premiums paid prior to December 31, 1994 will be determined.

To do this, the total return obtained will be multiplied by the weighting coefficient resulting from the following quotient:

  • In the numerator, the result of multiplying the corresponding premium by the number of years elapsed since it was paid until the collection of the payment.

  • In the denominator, the sum of the products resulting from multiplying each premium by the number of years elapsed since it was paid until the collection of the payment.

In summary:

(Premium x number of years elapsed until collection) ÷ ∑ (each premium x number of years elapsed until collection)

2. Calculation of reducible net income

The portion of the net income corresponding to each of the premiums paid prior to December 31, 1994, which was generated prior to January 20, 2006, will be determined.

For this purpose, the amount resulting from the operation mentioned in number 1 will be multiplied. above by the weighting coefficient resulting from the following quotient:

  • In the numerator, the time elapsed between the payment of the premium and January 20, 2006.

  • In the denominator, the time elapsed between the payment of the premium and the date of collection of the benefit.

In summary:

Weighting coefficient = Days elapsed since the payment of the premium until 20-01-2006 ÷ Days elapsed between the payment of the premium and the collection date

3. Joint maximum limit and applicable reduction percentages

The total amount of deferred capital corresponding to life insurance policies to which the transitional regime has been applied, obtained from 1 January 2015 until the time of temporary allocation of the deferred capital, will be calculated, distinguishing the following situations for the purposes of applying the reduction percentages (also called abatement coefficients):

  1. That the calculated amount (including the amount of deferred capital obtained to which the transitional regime is intended to be applied) is less than 400,000 euros .

    In this case, the reduction percentage of 14.28% for each year between the payment of the corresponding premium and 31 December 1994 shall be applied to each of the parts of the net income calculated in accordance with the provisions of point 2 above.

    When more than six years have passed between these dates, the percentage to be applied will be 100%.

  2. That the calculated amount (including the amount of deferred capital to which the transitional regime is intended to apply) is greater than 400,000 euros, but the amount of deferred capital obtained to which the transitional regime is intended to apply is less than 400,000 euros .

    In this case, the reduction will be applied to each of the parts of the net income generated before January 20, 2006 that proportionally correspond to the part of the deferred capital that, added to the deferred capital obtained previously, does not exceed 400,000 euros.

  3. That the amount corresponding to the deferred capital obtained previously is greater than 400,000 euros .

    In this case no reduction will be made.