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How is life insurance taxed in inheritance?

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One of the main reasons why life insurance is taken out is so that our beneficiaries have financial peace of mind after death. With this capital that they will receive, they will be able to face the expenses that will arise, including those of the funeral.

But is it a profit of money? Not always, because you have to take into account that the capital that the beneficiary receives in the life insurance will have to declare it in the inheritance tax. Yes, you read correctly, you will have to pay taxes on that money received.

Is it always like this?

No, but almost always. This happens when the beneficiary is different from the policyholder because if the person who receives the capital is the same person who has contracted the insurance, he will have to declare that money in personal income tax. But this is not usual, because we usually leave the money to other people so that they can face what awaits them in the future with more peace of mind.

But before continuing, let’s clarify some terms.

What is inheritance tax?

The so-called inheritance and gift tax is a tax burden that is delegated to the autonomous communities, where each one applies it as it sees fit. In other words, the same is not paid in Madrid, Andalusia, or Catalonia, to give an example.

Inheritance tax is an amount that must be paid by people who receive an inheritance that increases their wealth. One donation is if what you receive is a donation. This tax is regulated in a state manner by Law 29/1987 of December 18 on Inheritance and Donations Tax, but as indicated before, each community has its collection delegated and each one applies an interest rate.

In summary, these are the three cases in which you will have to pay for this tax:

  • You receive an inheritance upon death
  • If you are a life insurance beneficiary
  • Because you receive goods by donation in life

How is life insurance taxed?

In inheritance and gift tax, two cases can occur with the capital collected from life insurance.

  • If the person who collects is the beneficiary of the insurance, he will have to pay inheritance tax.
  • And if the person who collects is the insurance holder because he receives the survival insurance benefit, he is taxed in the form of donations.

The usual thing is that you have to pay inheritance tax and the beneficiaries of this insurance are obliged to pay this tax within a maximum period of 6 months since the policyholder dies. And a form from the Tax Agency is filled out where all the data of the beneficiary and the amounts received are specified.

One thing to be clear about is that the higher the capital you receive, the more you will have to pay because a percentage of the total is applied to you.

One issue must be taken into account because it is one of the exceptions and therefore you will not have to pay this tax. And it is that if the beneficiary turns out to be a legal person, that capital increase will have to be taxed in the Corporation tax.

In the event that this heritage is received by a legal entity, it will be exempt from Inheritance Tax, but on the other hand, it must pay Corporation Tax.

Partial settlement of inheritance tax

It may happen that at the time the compensation for the death of the insured is received, the beneficiary or beneficiaries do not have the necessary liquidity to face the inheritance tax. This is something that happens quite a few times. What needs to be done is to carry out a partial settlement of this tax because the law allows a document to be submitted where this question is requested. Of course, it is necessary to demonstrate that there is not enough money to pay the tax.

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