Exemption from tax on interest from a life insurance policy
With respect to the exemption from tax on interest from a life insurance policy pursuant to Section 20(1) no. 6 of the 2004 Income Tax Act [Einkommenssteuergesetz 2004, EStG 2004], it is open to question whether this ceases to apply if the insurance policy is used as security for a loan to finance not just the acquisition costs of a property, but also capital raising costs above the de minimis threshold level of €2,556 (Section 10(2) sentence 2(a) EStG 2004).
Financing of capital raising costs with adverse tax consequences
In a specific case, the acquisition costs of a property that had been purchased were € 3,189,501, however, the loan disbursement amount was € 3,200,000 and thus € 10,489 above the acquisition costs. The Düsseldorf tax court, in its ruling of 28.2.2025 (case reference: 10 K 492/22 F), disallowed the exemption from tax on the interest. It was admittedly indisputable that this concerned a life insurance policy within the meaning of Section 10(1) no. 2(b) EStG. Using the insurance policy as security for a loan was however harmful from a tax perspective. This was because the loan funds were not used exclusively to finance the acquisition costs of a specific asset intended for the generation of income, but also to finance to a small extent the capital raising costs, which constitute allowable costs. As the de minimis threshold level of € 2,556 had been exceeded the reverse exception under Section 20(1) no. 6 sentence 4 EStG 2004 in conjunction with Section 10(2) sentence 2(a) EStG did not apply. The court rejected the idea of dividing up the loan into tax-privileged and non-tax-privileged parts.
Tax aspects of property financing backed by a life insurance policy
From the decision of the Düsseldorf tax court, it is possible to derive the following recommendations for tax structuring in connection with property financing.
- Loan planning - The loan should be used exclusively for the acquisition costs. Co-financing, for example of the capital raising costs, should be avoided. Significant portions of the loan should not flow into non-tax-privileged costs that exceed the de minimis threshold level of €2,556. Dividing up into tax-privileged and non-tax-privileged uses is not possible.
- Capital raising costs - In the present context these are non-tax-privileged. They should therefore be preferably financed separately, or borne out of own funds.
- Documentation - The use of the loan funds has to be recorded clearly and comprehensibly.
