Tax-detrimental assignment of a life insurance policy
April 8, 2012 | 40,00 EUR | answered by Oliver Burchardt
Hello, the following situation:
1985: Purchase of a (rented) apartment, financing through a bank, securing the financing through entry in the land register
1995: Financing continues with the same bank, securing the financing through assignment of a life insurance policy taken out for this purpose
2011: Sale of the apartment, repayment of the loan through repurchase of the insurance + part of the purchase price
= Capital gains tax due!
Question: Is this correct? Is this necessary?
Dear inquirer,
Thank you for your inquiry, which I am happy to answer as part of an initial consultation.
The case you have presented is relatively complicated.
From my point of view, the sale of the life insurance policy is not subject to tax. You still have a so-called old contract (i.e. a contract concluded before January 1, 2005). For such contracts, there is a clause in the Income Tax Act that declares the application of the regulations that were in force on December 31, 2004, to be applicable.
Under the Income Tax Act valid at the time, life insurance policies could be used as security for the purchase of residential property without generating negative tax consequences.
Insurance companies today take the "simple" route and apply the current legal situation, which in the case you described, establishes a tax liability. Unfortunately, based on my experience, you are unlikely to succeed in getting back the capital gains tax paid from your insurance company.
However, this is only a temporary problem. In your income tax return for 2011, you should indicate the capital gains tax paid and explain the situation in a separate letter (refer to § 10 para. 2 sentence 2 EStG as of December 31, 2004, and the regulations on the acquisition of privileged assets). The tax office will then refund the excess capital gains tax paid to you as part of the income tax assessment.
I hope my explanations have been helpful to you.
Best regards,
Oliver Burchardt
Tax advisor
