The Client
María is a 70-year-old Spanish tax resident widow who lives in Madrid. She holds a €5 million financial portfolio as a result of the sale of her company some years ago.
She has two adult daughters who are currently resident in the UK and France, but they may return to Spain in the future or move elsewhere.
María is concerned about the potential impact of Spanish inheritance tax on her daughters, especially if there are future changes to the Spanish Inheritance and Gift Tax rules.
Some years ago, she already gifted certain assets to her daughters, taking advantage of the favourable gift tax rules in Madrid, but she is not willing to gift more assets at this stage.
The Solution
María’s advisers recommend that she subscribes to two mixed-term unit-linked life insurance policies with a foreign specialised insurer, covering both the survival and death contingencies. The contracts shall be governed by Spanish law and will be issued and executed in either Ireland or Luxembourg.
The proposed policy structure, for each contract, will be as follows:
- Policyholder: María
- Lives Assured: María and her daughters (on a last-death basis)
- Beneficiaries on Survival: María’s daughters
- Beneficiaries on Death: María’s grandchildren
A recommendation is made to include certain special conditions in these policies by which, in case of María’s death (as policyholder), the policy’s survival benefit shall only be paid to her daughters 3 and 7 years respectively after her date of death. In case of the death of all lives assured, the death benefit shall be paid to María’s grandchildren. It would also be possible to include certain special conditions to prevent them from receiving the death benefit in they are too young at that time, or to receive it in different instalments.
The Benefits
- The payment of the survival benefit is postponed 3 and 7 years for each policy, delaying the tax event for María’s daughters. This gives them certainty as they will know exactly when they will receive the insurance benefit, allowing them to plan accordingly.
- The payment of the insurance benefit will be done smoothly by the insurer and separately from the inheritance process.
- The survival benefit will be treated as a gift for Spanish tax purposes, even though it is conditional on the death of the policyholder.
- If María’s daughters are Spanish resident at the time of receiving the survival benefit, the relevant Madrid Gift Tax rules (where the donor was resident) will apply to them. Whilst the current Madrid Gift Tax rules are very favourable between close family members, including a 99% tax relief, these could change in the future.
- If María’s daughters are non-Spanish resident, they would not be subject to Spanish tax, since it will be a contract issued and executed outside of Spain with a foreign insurer who operates in Spain under freedom of services (i.e., non-Spanish situs asset).
- Even if María’s daughters are resident in Spain when they receive the insurance benefit, since the payment is postponed 3 and 7 years and hence the taxation is deferred, this will result in a direct saving for Spanish Wealth Tax/Solidarity Tax purposes.