Inheritance tax in a family business

It is impossible to anticipate when you might inherit from family members but it is important to know the basics of how the Spanish inheritance tax for family businesses works in order to simplify an already difficult time.

First of all, in order to inherit a family business, the inheritance must be accepted. By accepting the inheritance, the heirs will have certain rights and obligations, thus becoming the owners of the company.It is vital to keep in mind that when you assume ownership of a business, you will have to take on any debts incurred by the previous owner in addition to the business management and all the burdens that the inheritance entails.

Inheriting a company is much cheaper than inheriting property or money. Inheritance tax levies taxes on family businesses at a much lower rate so that heirs can continue the legacy, which would be difficult if the general taxation rules were applied.

Inheritance tax reduction in a family business

In order to protect the continuity of family businesses, the law grants a 95% reduction in inheritance tax for them, both individually and through companies, allowing them to be practically exempt from taxation.

However, inheritance tax is devolved to the Autonomous Communities, which have a broad regulatory capacity to modify the reduction and extend it. The extension of the reduction by the communities when inheriting a family business reaches 99% and in some communities even 100% reduction of the tax base. The Balearic Islands, on the other hand, is one of the regions that has not extended it, leaving it at 95%.

It is crucial when inheriting a family business to have a favourable tax framework to ensure that productive assets are maintained and that economic activity and jobs are not threatened. When inheriting a family business, the amount of tax payable will depend on the following three factors:

Level of kinship to the deceased.
The inherited assets of the deceased.
Pre-existing assets of the person who is to receive the inheritance.

Requirements to obtain the reduction when inheriting a family business

In order to benefit for the 95% reduction for a family business, a series of requirements must be met:

The company carries out economic activity other than the management of movable or immovable assets.
The person who dies or makes the donation holds a 5% sharehold individually or 20% jointly by his or her family group.
The individual or one of the members of the family group exercises the functions of direction or management of the company and their remuneration is greater than 50% of their total income from work and economic activities.
The management functions are effectively exercised by the individual or by one of the members of the family grou

In addition to these requirements, the heirs must take over the company for a period ranging from 5 to 10 years, depending on the Autonomous Community (in the case of the Balearic Islands it is five years).

Additional requirements

If inheriting a family business by bequeath, additional requirements must be met in order to benefit from the reduction:

The bequeather must be disabled or 65 years old or older.
In the case of the bequeather exercising managerial functions, from the moment of the transfer, he must resign from exercising his or her position and therefore receiving remuneration for the exercise of these functions.
The beneficiary must maintain the company or the shares for 10 years in addition to the exemption from wealth tax.

Finally, who is eligible for the reductions? The heirs must be:

Biological or adopted children of the deceased.
Spouse of the deceased.
In the absence of the above, the surviving parents, adoptive parents or collateral relatives up to the third degree of the deceased.

Another article that may interest you:

Who will take care of your children if you die?

At Moya & Emery we are experts in inheritance law. If you need advice on how to make your will do not hesitate to contact us. If you find yourself in this situation and you wish to exempt yourself from 95% of the inheritance tax, do not hesitate to ask us for an appointment.

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You can also visit our offices in Palma and Calvià (Mallorca).
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