We explain how refunds of interest paid will affect your tax return depending on the agreed recovery method.
Among the main tax changes introduced by Royal Decree-Law 1/2017, of January 20, 2017, are measures to regulate the tax effects arising from the refund, by financial institutions, of interest previously paid by taxpayers as a result of mortgage floor clauses in loans taken out with them. These measures will apply whether the refund of such amounts results from an agreement reached between the parties in an out-of-court process or from a court judgment or arbitration award.
How will the amounts refunded by financial institutions be taxed?
Amounts refunded under agreements with financial institutions, whether in cash or through equivalent compensation measures, previously paid to those institutions as interest for the application of interest rate floor clauses on loans, should not be included in the taxable base for Personal Income Tax (IRPF). Nor should any related compensatory interest be included in the taxable base.
Therefore, it is not appropriate to include in the personal income tax return either the amounts received as a result of the return of interest paid or the compensatory interest recognized, due to the application of interest floor clauses.
However, certain regularization assumptions are establishedin cases where such interest has been part of the deduction for investment in main residence or deductions established by the Autonomous Communities, or has been subject to deduction as expenses of real estate capital or economic activities.
What happens when the interest would have been part of the deduction for investment in a main residence?
When the taxpayer has previously applied the deduction for investment in main residence or regional deductions for the amounts received, he will lose the right to his deduction in relation to them.
However, the tax effects will differ depending on whether these amounts are received in cash or if better mortgage conditions or a reduction of the debt are agreed upon.
· If the taxpayer decides to receive the amounts in cash and has benefited from the deduction for the acquisition of housing, he must return the amounts deducted in excess in the last four non-prescribed years in the Personal Income Tax return of the year in which the judgment, the arbitration award or the agreement with the entity occurred, but without including late payment interest.
For example, if the judgment, award, or agreement occurs in 2016, the amounts deducted in excess in the 2012, 2013, 2014, and 2015 tax years will be adjusted in the 2016 income tax return (which will be filed in April, May, and June of 2017). If the amounts refunded include interest from 2016, this will no longer be taken into account for the deduction of the main residence for this year.
However, if the financial institution, instead of refunding the taxpayer the amounts paid, improves the mortgage terms or reduces the loan principal, there will be no need to adjust the previously claimed deductions corresponding to those amounts. Furthermore, the reduction in the loan principal will not generate the right to apply the deduction for investment in a primary residence.
Ultimately, it is more tax-efficient to negotiate better terms and a reduction in debt with the bank rather than receiving a cash refund.
What happens when the interest would have been a deductible expense in income from real estate capital or economic activities?
If the taxpayer included the amounts now received as deductible expenses from income from real estate or business activities in previous years' tax returns, these amounts will lose their deductible status. Therefore, the taxpayer must file supplementary tax returns for the last four open tax years, removing these expenses, without penalty, late payment interest, or any other surcharge.
The deadline for submitting supplementary declarations will be the period between the date of the judgment, award or agreement and the end of the next deadline for submitting self-assessment for this tax.
Recommendations
· If you are currently one of those affected by mortgage floor clauses, and are currently in negotiations with your financial institution to recover the amounts paid, we recommend renegotiating the mortgage conditions or a reduction of the mortgage debt instead of receiving a cash refund, as it is more tax-efficient.
However, if you ultimately choose to receive your refund in cash, we advise you to visit our offices to find out how the refund of these amounts will affect your tax return.
At Àmbit Assessor we are experts in national and international taxation and we would be happy to help you.
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A graduate in Business Administration from the University of Barcelona, she continued her education with a Postgraduate Diploma in Accounting and Management Control from Pompeu Fabra University, and completed various courses in tax and fiscal matters offered by the Terrassa Chamber of Commerce, the Barcelona Bar Association, and the Center for Financial Studies. Before joining Àmbit Assessor in 2001 as a tax and accounting consultant, she worked as an administrative assistant at Caixa Manresa and Banc Sabadell and as a tax information call center operator at the Spanish Tax Agency. For three years, she served as treasurer of the L'Alzinar Recreational and Cultural Society, a position she held concurrently with her work at Àmbit Assessor.
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