Transfer of assets by taxpayers over 65 years of age with reinvestment of the amount obtained in life annuities
With the 2015 tax season just weeks away, I'd like to discuss one of the tax changes that benefits those over 65. This involves the exclusion from taxation of capital gains realized from the transfer of assets by taxpayers over 65, provided the proceeds are used to purchase a guaranteed lifetime annuity in their favor.
The Personal Income Tax (IRPF) regulations already included a tax benefit for individuals over 65 who sold their primary residence. In these cases, the resulting capital gain was exempt without the need to reinvest the proceeds. The exemption also applies to the transfer of the bare ownership of the primary residence by its owner, who retains the right to live in the property for life.
The new tax measure that will begin to be applied in the 2015 income tax affects the transfer of assets other than the main residence and the exemption of the capital gain is conditional on the reinvestment of the amount obtained in the transfer in a guaranteed life annuity in favor of the taxpayer.
The transferred assets do not necessarily have to be real estate; they can be shares, investment funds, rights, real estate, etc., and these assets may or may not be related to economic activities.
This exemption will also apply when the reinvestment of the transferred amount is partial. In this case, when a lesser amount than that obtained from the transfer is reinvested, only the capital gain proportionally corresponding to the reinvested amount will be exempt.
Requirements for applying for the reinvestment exemption
In order to apply for the exemption, the taxpayer must meet a series of conditions and requirements:
1. Be over 65 years old at the time of the transfer of the asset.
2. Allocate the proceeds from the sale of the asset to establish a guaranteed life annuity in favor of the taxpayer within six months of the date of sale. If the proceeds are not reinvested within this six-month period, the taxpayer will not be eligible for the reinvestment exemption.
3. The life annuity must meet the following requirements:
a. The life annuity contract must be signed with an insurance entity and the taxpayer must have the status of beneficiary.
b. The life annuity must have a periodicity of less than or equal to one year, and the annual amount of the annuities may not decrease by more than 5% compared to the previous year.
c. The taxpayer must inform the insurance company that the life annuity he/she contracts constitutes the reinvestment of the amount obtained from the transfer of assets, for the purposes of applying the exemption.
4. The maximum total amount that can be used to establish life annuities and that entitles the holder to apply the exemption is €240,000. It is possible to apply the reinvestment exemption to several transfers until the maximum reinvestment limit of €240,000 is reached.
Advance payment of the life annuity
The advance, in whole or in part, of the economic rights derived from the life annuity established, will determine the loss of the tax benefit and tax must be paid on the capital gain that was declared exempt.
In this case, the taxpayer will attribute the non-exempt capital gain to the year in which the transfer of the asset took place, making a supplementary self-assessment for that year including late payment interest, which will be submitted within the period between the date of non-compliance and the end of the regulatory period corresponding to the tax period in which the non-compliance occurs.
Other tax benefits of life annuities
In addition to the aspects already mentioned, life annuities enjoy other tax benefits. Life annuities not acquired through inheritance, bequest, or any other form of succession will have a portion of the income received exempt from taxation, depending on the taxpayer's age at the time the annuity was established. Therefore, taxpayers receiving life annuities will only consider as investment income the percentage calculated by applying the following percentages to each annual payment:
40 percent, when the recipient is under 40 years old.
35 percent, when the recipient is between 40 and 49 years old.
28 percent, when the recipient is between 50 and 59 years old.
24 percent, when the recipient is between 60 and 65 years old.
20 percent, when the recipient is between 66 and 69 years old.
8 percent, when the recipient is over 70 years old.
These percentages will correspond to the annuitant's age at the time the annuity is established and will remain constant throughout its term. For example, a 70-year-old taxpayer will only impute 8% of the annual annuity received as investment income, meaning that 92% of the income obtained will be exempt.
We have informed you about the tax benefits that taking out a lifetime annuity would provide, and we remain at your disposal for any questions you may have on this matter.
At Àmbit Assessor we are experts in national and international taxation and we would be happy to help you.
Maribel Isart
Fiscal Area
Àmbit Assesor
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A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.
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