Back from the summer holidays and looking for some good news?
Here is a little tax gift for landlords in Spain.
Imagine you own a property which you rent out. You have a mortgage on the property and, as part of the mortgage conditions, you have taken out a life insurance policy which gives you a reduction in the mortgage interest rate.
You pay 600€ a year for the life insurance.
Can you deduct those 600€ when calculating the taxable income from your rental property?
The answer, following a recent ruling by the Spanish Tax Appeals Tribunal (TEAC), may come as a surprise: in certain circumstances, yes.
The TEAC has established that premiums for life insurance linked to a mortgage over a rented property can be treated as a deductible financing expense where taking out the insurance results in a reduction in the mortgage interest rate.
The issue, therefore, is not simply whether you have life insurance, but whether that insurance is connected to the financing of the rented property and actually reduces the cost of that financing.
A life insurance policy that can reduce your rental tax
When calculating the net income from a rental property in Spain, certain expenses connected with the property and its financing can be deducted from rental income, subject to the applicable rules and limits.
The question was whether a life insurance premium could be considered one of those financing expenses.
The Spanish tax authorities had previously taken the view that it could not. The reasoning was that the insurance was not essential to obtaining the mortgage: without the insurance, the mortgage could still be obtained, but at a higher interest rate.
The TEAC has now taken a different view.
According to the Tribunal, an expense does not have to be absolutely compulsory or indispensable to generate rental income in order to be considered a necessary expense. What matters is whether there is a sufficient connection between the expense and the income being generated.
In this case, the insurance reduces the cost of the mortgage financing and therefore has a sufficient connection with the rental property.
For example, imagine you receive 18.000€ in rental income during the year and pay 600€ for a life insurance policy linked to the mortgage.
If the conditions established by the TEAC are met, those 600€ may be included as a deductible financing expense when calculating the net rental income.
This does not mean that the Spanish Tax Office refunds 600€. Instead, the 600€ reduces the rental profit on which you are taxed.
The important point: the insurance must be linked to the mortgage
This is where it is important to be precise.
The TEAC ruling does not mean that every life insurance policy held by a landlord is tax deductible.
The insurance must form part of the conditions of the mortgage and its subscription must result in a bonification or reduction of the mortgage interest rate.
For example, a bank may offer a mortgage at 3.50% without the insurance and 3.00% if the borrower takes out the associated life insurance.
In that situation, the insurance directly affects the cost of financing the rented property.
A life insurance policy taken out independently by the landlord, with no effect on the mortgage interest rate, is not covered by this criterion simply because the person owns a rental property.
How much can be deducted?
The deduction also needs to correspond to the period during which the property is actually rented and generating income.
For example, if the annual life insurance premium is 600€ but the property was rented for only six months, the amount attributable to the rental period would be 300€, assuming the other requirements are met.
Landlords should also retain the relevant documentation, including the mortgage agreement, insurance policy and evidence showing that the insurance results in a reduction in the applicable interest rate.
Please note: this is not a deduction for every life insurance policy
The TEAC’s criterion is specifically limited to life insurance incorporated into the conditions of the mortgage financing of a rented property, where taking out the insurance results in a reduction in the mortgage interest rate.
The Tribunal also makes clear that the deduction is not based on the insurance covering the property itself. Life insurance covers the person, not the building.
Instead, its deductibility comes from its consideration as a financing expense.
The TEAC rejected the appeal brought by the Spanish Tax Agency (AEAT) and established a binding criteria on this issue.
As always, the tax treatment depends on the individual circumstances of the taxpayer and the specific terms of the mortgage and insurance.
Conclusion
Coming back from the summer holidays, a tax ruling is probably not the first thing most landlords were hoping to find.
But this one may be worth knowing about.
For landlords in Spain, the TEAC has provided a favourable clarification: where a life insurance policy forms part of the mortgage conditions of a rented property and taking out that insurance reduces the mortgage interest rate, the premium can be treated as a deductible financing expense when calculating the rental income.
It is not enough simply to have a mortgage and a life insurance policy. The connection between the two, and the effect on the interest rate, are key.
So perhaps, as you settle back into work after the summer, there is one more document worth digging out from the drawer:
“Does my mortgage life insurance reduce my interest rate?”
If the answer is yes, there may be a little tax gift waiting for you after the holidays.
