In the current fiscal environment, taxpayers are showing an increasing interest in unit-linked life insurance as an instrument that helps to mitigate the impact of the Spanish Wealth Tax [Impuesto sobre el Patrimonio, “IP”].

Under the IP legislation, a life policy must be declared at its surrender value at the time the tax becomes payable. Therefore, if the policies have no surrender value, they should not be included in the taxable amount. The right to surrender the policy may be lacking (1) because the policyholder has irrevocably designated third parties as beneficiaries and has consequently relinquished, pursuant to Article 87.2 of the Insurance Contract Act, the possibility of opting for surrender; or (2) because the right is not granted under the policy.

In cases where one or more third parties have irrevocably been designated as beneficiaries, the policyholder ceases to have certain rights, including the right of surrender, and it is therefore generally agreed that there is no liability for IP. This has been recognized by the Spanish Directorate-General for Taxation [Spanish initials: DGT] in its Resolutions V0137-06 and V0136-06.

With regard to those cases in which the policy does not grant the policyholder the right of surrender, the DGT has recently confirmed, in a number of replies to written tax queries, that a unit-linked policy with no surrender value during the life of the policy should not incur IP liability (Binding resolutions V2516-17, V3070-17), even where the policyholder has designated himself as the beneficiary and can therefore recover his investment at maturity. The DGT has thus confirmed the validity of a principle that had previously been upheld by Spain’s Central Economic-Administrative Tribunal in its decisions of March 2, 2007 (RG No. 1046/2005, RG No. 507/2005, and RG No. 501/2005).

To meet its customers’ needs and in compliance with Spanish tax regulations (see specifics for Basque Country and Navarra), Lombard International Assurance has designed a unit-linked life insurance policy that does not grant policyholders the right of surrender during the policy term, enabling policyholders to recover their investment at maturity while allowing them to optimize their liability for IP.

The policy offers, in addition, all the advantages of a classic Luxemburgish unit-linked policy. These include deferral of Spanish Personal Income Tax [IRPF], Inheritance and Gift Tax planning and simplified filing requirements, as well as great investment flexibility and the protection offered to investors by Luxembourg’s “Triangle of Security", one of the strongest policyholder protection regimes in Europe.

A unit-linked policy that is properly structured and adapted to policyholders’ circumstances could be the most effective solution for the management and protection of their assets and for succession planning, by taking advantage of the many benefits offered by the Spanish legal system to wealth management systems of this kind, as well as the stability and protection that Luxembourg provides.

By Pablo Peciña
Associate Director - Wealth Structuring Solutions
Lombard International Assurance

This article was originally published in Spanish in FundsPeople.