Inheritance management: the working child and the 95% reduction in Inheritance Tax

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In many family inheritances, the deceased personally managed a small portfolio of rented properties or relied on the help of a child or another family member. In these cases, a very common question is whether that family member can be considered the “full-time employee” required by law for the rental activity to be regarded as an economic activity.

This detail is fundamental: it determines whether important tax benefits can be applied, such as the 95% reduction in Inheritance Tax in Catalonia. In this article, we explain in a clear, professional manner, based on the regulations and doctrine of the General Directorate of Taxes (DGT), when a child can meet this requirement and how it directly affects the heirs.

The legal requirement: a full-time employee

For the leasing of real estate to be considered an economic activity and for tax benefits to apply, Article 27 of the Personal Income Tax Law requires that there be at least one person employed under an employment contract on a full-time basis.

This criterion also applies to the Wealth Tax and the Inheritance Tax, which refer to the definition of Personal Income Tax in order to determine which activity may benefit from the reductions applicable to the family business and business assets.

The General Directorate of Taxes has reiterated this in various rulings, such as V0085-23 (23 January 2023), which states:

“The requirement will only be deemed to be met if the contract is classified as an employment contract under the current labour regulations and is full-time.”

Therefore, it is not sufficient for a family member to assist with management or to be paid a remuneration. There must be a valid employment contract that complies with labour and Social Security regulations.

Can the child be that employee? It depends on their employment and family situation

In many families, the child who collaborated in the management is considered the natural candidate to meet the requirement. However, labour and Social Security regulations establish clear limits.

According to the legal framework, the situation is as follows:

Child over 30 years old who lives with the owner

• Must be registered as a collaborating self-employed worker.
• Cannot be hired as an employee.
• Conclusion: Does NOT meet the tax requirement.

Child over 30 years old who does NOT live with the owner

• May be hired under the General Regime.
• Their employment contract does meet the requirement.

Child under 30 years old, whether living together or not

• May be hired as an employee.
• Meets the requirement, even if they are not entitled to unemployment benefits.

In short, only when the child is included in the General Regime, with a valid full-time employment contract, is the legal requirement considered to be met.

The following table shows a scheme regarding classification under the corresponding Social Security regime:

AGE	SOCIAL SECURITY REGIME	REQUIREMENTS	UNEMPLOYMENT BENEFIT / ACTIVITY CESSATION BENEFIT
UNDER 30 YEARS OLD	Hiring as an employee under the General Regime (even if living with the self-employed owner).	Must be under 30 years of age, or over 30 when having specific difficulties for labour market integration (Additional Provision 10 of the Self-Employed Workers’ Statute and Article 12.2 of the General Social Security Law).	No entitlement to unemployment benefit in the case of cohabitation with the self-employed business owner. Entitlement to unemployment benefit in the case of no cohabitation with the self-employed business owner, provided that contributions are paid for such benefit.
MAYOR DE 30 AÑOS	Hiring as an employee under the General Regime.	Maintain an employment relationship identical to that of any other employee, with economic independence from the principal self-employed worker and no cohabitation with them.	Entitlement to unemployment benefit only when: a) Contributions have been paid for that purpose. b) It can be proven that the employee is not economically dependent on the principal self-employed worker. c) There is no cohabitation with the parent (a different address registration alone is not sufficient). d) The employment relationship is equivalent to that of other employees (working hours compliance, salary payment, payslip issuance).
	Provision of services as a collaborating self-employed worker.	Those applicable to a collaborating self-employed worker: being the spouse, registered partner or family member of the principal self-employed worker, related by blood or affinity up to the second degree inclusive, and, where applicable, by adoption, with cohabitation.	Activity cessation benefit for self-employed workers.

What if the child has another full-time job?

This point is decisive. The General Directorate of Taxes has expressly ruled that an employee with two full-time contracts cannot meet the requirement for a rental activity to be considered an economic activity.

What the General Directorate of Taxes indicates is that the requirement that the employee devote their full working day to the “exercise of their own professional activity or to the organisation of another taxpayer’s activity” is not met.

In other words, if the child is already employed full-time by another company, it is impossible for them to devote their entire working day to managing the properties.

The reason is evident: from a strictly tax perspective, a person cannot work full-time in two jobs at the same time. When this situation occurs, the Tax Administration considers that:

• There was no real economic activity.
• The properties were not allocated to any activity.
• The income must be treated as real estate capital income.

And, in the field of inheritance:

• The 95% reduction provided for under Catalan regulations cannot be applied.
• The heirs must be taxed on the full value of the properties.

Even if the family member actually worked, labour incompatibility nullifies the tax benefit.

Why does this affect heirs so significantly?

The Tax Authorities review whether, during the lifetime of the owner, the activity did or did not comply with the formal requirements.

Let us imagine a very common case: the owner’s child constantly helped manage the leased properties, but at the same time held another full-time employment contract. In such a situation, the Administration understands that there is no employee fully dedicated to the activity, a requirement for leasing to truly be considered an economic activity.

Ruling:

“This implies that if part of the working day is devoted by the employee to the exercise of their own professional activity or to the organisation of another taxpayer’s activity, the required conditions would not be met and the income derived from the leasing of real estate assets would be classified as real estate capital income.”

“In the present case, according to the information provided in the ruling request, the person hired by the entity to manage the leasing activity under a full-time employment contract is, in turn, employed by another employer under a full-time employment contract. Therefore, the employee would be dividing their working day between two different jobs, not devoting their full working day to the organisation of the real estate leasing activity. This constitutes a failure to meet the requirements set out in Article 27.2 of the Personal Income Tax Law, and consequently the real estate leasing activity carried out by the entity in which the applicant holds 100% of the share capital cannot be considered an economic activity for the purposes of the exemption under the Wealth Tax.”

As a consequence, the properties cease to qualify as business assets, which means that the 95% reduction in Inheritance Tax cannot be applied. The final result is a significant increase in the tax payable, as the heirs must be taxed on the full value of the assets received.

By contrast, if the child meets all labour law requirements, their full-time employment contract allows the activity to retain its character as an economic activity and enables the tax benefit to be applied.

Conclusion

The type of contract of the child or family member who assists in managing rental properties is not a mere formality: it is a decisive element in determining whether heirs may apply the tax benefits under Inheritance Tax.

What the General Directorate of Taxes indicates is that the requirement that the employee devote their full working day to the “exercise of their own professional activity or to the organisation of another taxpayer’s activity” is not met when that person already has another full-time job. Consequently, it cannot be considered that a real economic activity exists.

Key points:

• Without a valid employee, the activity ceases to be economic and the 95% reduction is lost.
• The employee must be included in the General Regime, not as a collaborating self-employed worker.
• They must work full-time and without incompatibilities.
• If the employee has another full-time job, the requirement is not met.