When a family’s wealth sits in companies, property and collections, the problem on a death is rarely the size of the estate. It is liquidity: taxes, debts and legal costs fall due in cash, within deadlines, while the assets that could pay them are illiquid, shared between heirs, or part of a business that must keep running. Life insurance is one of the few tools that produces a known sum of money, at the moment it is needed, outside the timetable of a sale. How useful it is — and how it is taxed — depends heavily on whether the family is in Spain or in Portugal.
Spain: life insurance and the inheritance tax
Spain taxes inheritances and gifts through the Impuesto sobre Sucesiones y Donaciones, governed by Ley 29/1987. Its scope expressly includes amounts received by the beneficiaries of life insurance contracts when the policyholder is a different person from the beneficiary (art. 3.1.c). In practical terms, a policy taken out by a parent on their own life, paid to a child, is normally within the tax; a policy taken out and paid for by the beneficiary on someone else’s life is treated differently and may fall under income tax instead.
The tax is ceded to the autonomous communities, which set many of the reductions and reliefs. As a result, the cost of the same inheritance can vary considerably depending on the community whose rules apply, the relationship between the deceased and the heir and, for non-residents, the connection to Spain. Some communities apply very substantial reliefs for spouses and children; others tax the same transfer significantly. The answer for a particular family is a question for a Spanish tax adviser.
For a family with significant Spanish assets, life insurance is therefore used in two ways: to fund the tax itself, so that heirs are not forced to sell property or shares under time pressure, and to equalise between heirs, when one child inherits a business and the others need comparable value in cash.
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Portugal: no inheritance tax, but stamp duty
Portugal abolished inheritance and gift tax in 2004. Gratuitous transfers are subject instead to stamp duty (Imposto do Selo), from which spouses and unmarried partners, descendants and ascendants are exempt. Sums paid under life insurance are outside the scope of that stamp duty on gratuitous transfers (Código do Imposto do Selo, art. 1(5)(a)). For families resident in Portugal, life insurance is therefore less about tax and more about liquidity: paying off loans, keeping a company solvent while it is restructured, buying out a relative’s share or protecting a surviving spouse.
Families with a foot in each country
Many families live in Portugal and own property in Spain, or the reverse. The tax analysis of a cross-border estate depends on the residence of the deceased and of each heir, where the assets are, the law applicable to the succession — which, under the EU Succession Regulation, is generally that of the deceased’s last habitual residence unless they chose the law of their nationality — and any double taxation rules. None of that is insurance advice. What insurance can do is make sure that, whatever the answer, the cash exists.
Structuring the cover
- Term or whole of life. Term cover for a defined period, such as while loans are outstanding or children are young; whole-of-life cover when the need is the estate itself.
- Who owns the policy, who pays and who benefits. These three choices drive the tax treatment in Spain and should be set with the tax adviser before the policy is issued.
- Joint-life policies that pay on the second death, when the liquidity need arises only after both spouses have died.
- Key person and shareholder protection for the family business, so that the company, not only the family, can absorb a death — see key person insurance when you still own businesses abroad.
- Underwriting. Larger sums require medical and financial underwriting, which takes time; cover is best arranged well before it is needed.
Frequently asked questions
Is life insurance subject to inheritance tax in Spain?
Generally, yes, when the beneficiary is not the policyholder: Ley 29/1987, art. 3.1.c includes those sums in the inheritance and gift tax. Reliefs and rates depend largely on the autonomous community whose rules apply, and should be confirmed with a Spanish tax adviser.
Is life insurance taxed on death in Portugal?
Sums paid under life insurance are outside Portuguese stamp duty on gratuitous transfers (Código do Imposto do Selo, art. 1(5)(a)), and Portugal has no inheritance tax as such. Other taxes may apply in specific structures, so a tax adviser should confirm the position.
Why use life insurance for succession at all?
Because it produces cash at the moment it is needed — to pay taxes and debts, to equalise between heirs, or to keep a business running — without forcing a sale of property, shares or collections under time pressure.
Can a policy from another country be used?
Sometimes, but its tax treatment in Spain or Portugal may differ from the country where it was issued. Existing policies should be reviewed against the family’s current residence and assets.
A written review of your life cover
Tell us where the family lives and holds assets, and which life policies exist. We reply in writing with how the cover works today and the questions to settle with your tax adviser.
This article is general information and does not constitute personalised, legal or tax advice. Cover, limits and exclusions are only those of the policy actually issued, after underwriting. Tax rules change and depend on individual circumstances; confirm them with a qualified tax adviser. Adler & Rochefort is a commercial brand of Ownizo, Unipessoal Lda., mediador registado na ASF n.º 425591790/3.
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