The General Directorate of Taxes has ruled that transferring the collection of a life annuity free of charge is subject to Inheritance and Donations tax, but subsequent monthly payments are exempt from income tax.
The General Directorate of Taxes (DGT) has resolved one of the most common tax questions in estate planning. In a binding resolution, the agency under the Ministry of Finance clarified what happens when the holder of a life annuity donates the right to receive payments to a third party. The key point: the beneficiary will not have to declare those payments in their income tax.
The Donation is Subject to Inheritance and Donations Tax
The DGT establishes that the act of transferring the right to collect a life annuity without economic compensation constitutes a lucrative transfer inter vivos. Therefore, the new beneficiary is required to pay the Inheritance and Donations Tax (ISD) based on the current value of the right received.
The main concern for taxpayers was whether, in addition to receiving the money monthly, they had to declare it as income from movable capital in their tax return. The DGT categorically dismisses this.
Exemption from Income Tax for Received Monthly Payments
The agency invokes Article 6.4 of the Income Tax Law, which states that income already taxed by the ISD will not be subject to this tax. In other words, the periodic payments that the beneficiary receives later are exempt from being included in the taxable base of their income tax.
In this way, the Tax Authority avoids double taxation: the beneficiary pays once for the value of the right (via ISD), and the monthly payments they receive afterwards are not considered taxable income. The resolution is a relief for those receiving such donations, especially in family contexts.
The Inspection Can Verify the Declared Value
The DGT reminds that, regardless of the self-assessment submitted, the Tax Inspection retains the authority to conduct a subsequent value verification. Thus, it will check that the financial calculation of the donated right complies with the law and that the ISD has been correctly settled.
For the taxpayer, this means they must pay special attention to the valuation of the life annuity at the time of the donation. An error in that calculation could lead to a regularisation by the Tax Agency.
What This Means for the Reader
The resolution directly affects anyone considering donating a life annuity or who has received one as a donation. The beneficiary only pays ISD at the time of the donation, and the monthly payments they receive afterwards are free from income tax. This facilitates estate planning and reduces the tax burden on transfers between individuals.
Tax advisors recommend properly documenting the donation and calculating the value of the right with the help of a professional to avoid discrepancies with the Tax Authority. The DGT's resolution is binding, setting a clear precedent for future cases.
In practice, if a pensioner decides to donate the right to receive their life annuity to a relative, that relative will need to pay the ISD based on the current value of the right. However, each monthly payment they receive afterwards will not be added to their income tax base, resulting in significant long-term tax savings.
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