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What are the tax advantages of life annuities?

The income received will be considered as income from movable capital deducted in an elevated percentage, depending on the age of the beneficiary at the time of taking out the policy as described in the following table:

Age when constituting the income
% of income exempt from taxation
% of income considered capital gains
Over 70 years old
Between 66 and 69 years old
Between 60 and 65 years old
Between 50 and 59 years old
Between 40 and 49 years old
Under 40 years old

The amounts deemed to be income for the purposes of personal income tax will be considered as income from movable capital, included in the savings base under a progressive rate range of between 19% and 28%, depending on the amount, with the withholding tax being paid at the time the income is received.

Taxation in the event of death

The principal received by the beneficiaries designated by the policyholder will be subject to Spanish Inheritance and Gift Tax, including a deduction of €9,195.49 per beneficiary if there is a relationship of spouse, descendant or ascendant with the deceased, without prejudice to other possible deductions and/or rebates that may be applied in the tax by each Autonomous Community.

Taxation in the event of redemption

Note that, although all the life annuities described above are fully redeemable after the first year, their purpose is precisely to provide a lifelong annuity, so it is advisable, in order to keep both the annuity and the estate guaranteed, not to redeem the product. Redeeming a product may mean that the amount redeemed may be less than the amount that you initially contributed, plus you will be required to pay taxes on the income received, as it is no longer tax-exempt. If you do decide to redeem the annuity, the positive difference between the sum redeemed and the portion of the income received and not yet taxed, minus the single premium paid, will also be considered as income from capital. As capital gains, they are subject to withholding tax at the current rate in the respective Autonomous Community.

Taxation on exemption of capital gains for reinvestment in annuities for the over 65s.

Capital gains arising from the transfer of assets by taxpayers over 65 years old are excluded from taxation provided that the total amount obtained from the transfer is intended to constitute a guaranteed life annuity in their favour.

The life annuity must meet specific legal requirements, with Bankinter offering a choice of two types of annuity:

  • Type 50: designed to pay 50% of the principal contributed while insuring the other 50% for the beneficiaries in the event of death.
  • Type 0: designed to pay out 100% of the principal contributed, leaving the insured capital to the beneficiaries in the event of death at zero.

The following must also be met:

  • Be 65 years old or older at the time of asset transfer.
  • The life annuity must be set up within a maximum period of six months from the date the asset is transferred.
  • The maximum total amount that can be used for annuities is €240,000. Said limit is per taxpayer (not per operation or fiscal year). Once the €240,000 limit has been reached, any excess over this amount or the subsequent reinvestment in guaranteed annuities will not entitle the holder to further tax exemptions. You can make as many contributions as you wish, subject to a limit of €240,000 per taxpayer.
  • Full reinvestment is permitted (where the totality of the capital gain is exempt), as well as partial reinvestment of the amount obtained from the transfer (where the capital gain produced in the proportional part of the amount that has been reinvested is exempt).
  • The taxpayer must inform the insurance company that the life annuity taken out is reinvested.

So that there is no failure to reinvest, the annuity must be maintained until the death of the insured; the amount cannot be paid in advance, in whole or in part. Failure to comply with any of the conditions set out for the exemption, as well as the total or partial advance payment of the economic rights derived from the annuity, means the annuity will be taxed as a capital gain.