Estate management: Inheritance Tax in Catalonia

When a person dies, their heirs must face not only the emotional and patrimonial management of the inheritance, but also the tax obligations it entails. One of the most important is the Inheritance and Gift Tax, which taxes the transfer of assets and rights due to death.

Catalan legislation, however, provides for significant tax benefits in certain cases, especially when the deceased carried out an economic activity. Among these, the 95% reduction of the net value of the assets affected by that activity stands out, a measure that can represent very substantial tax savings for the heirs.

In this post we will look at what this reduction consists of, who can apply it, what requirements Catalan regulations impose, and in which situations the tax benefit may be lost.

What does the 95% reduction consist of?

Article 631-6 of the Catalan Tax Code allows the application of a 95% reduction of the taxable base in acquisitions by reason of death that correspond, among others, to descendants, ascendants, spouses or relatives up to the third degree, when the inherited assets are used in an economic activity carried out by the deceased.

This means that, when the deceased (that is, the person leaving the inheritance) carried out a business or professional activity, and the inherited assets formed part of that activity, the heirs may be taxed on only 5% of their value.

In practice, this measure seeks to encourage the continuity of family businesses or economic activities after the death, preventing heirs from being forced to sell assets or cease the activity in order to pay the tax.

Which assets are considered to be used in an economic activity?

Catalan regulations detail which assets may benefit from this reduction:

• Real estate in which the activity is carried out.
• Assets intended to provide services to the company’s staff, except those for private or leisure use.
• Assets necessary to obtain income from the activity.

On the other hand, the following are not considered to be used in the activity:

• Shareholdings in the equity of other entities.
• Financial or investment assets unrelated to the activity.

When an asset is used only partially for the activity, the allocation (and therefore the reduction) is limited to the part actually used. In the case of indivisible assets, partial allocation is not possible.

Unlike other regulations, the Catalan Tax Code does not require the assets benefiting from the 95% reduction to be exempt from Wealth Tax. Therefore, this requirement does not affect the application of the tax advantage in Catalonia.

Practical case: rental of real estate as an economic activity

One of the most common scenarios in which this reduction may be applied is that of the economic activity of leasing real estate carried out by an individual.

For the rental of dwellings or commercial premises to be considered an economic activity —and not mere asset management— the requirements established by Decree 414/2011, of 13 December, approving the Regulations of the Inheritance and Gift Tax, must be met:

• The deceased person had to be registered in the tax census or in the Tax on Economic Activities (IAE), under the heading corresponding to the leasing of real estate.
• In their Personal Income Tax (IRPF) return, the income obtained from the rental had to be reported as income from economic activities.
• They had to employ at least one person on a full-time basis whose role was the management of the leases.

If these conditions are met, the leased properties are considered assets used in an economic activity. Consequently, the heirs may apply the 95% reduction to their net value at the time of the transfer.

Requirements to maintain the reduction

The law not only requires that the assets be used in an economic activity at the time of death, but also imposes certain subsequent obligations in order to preserve the tax benefit.

First, the heir must maintain the economic activity for at least five years from the date of death of the deceased. Likewise, they are obliged to keep the inherited assets or rights —or assets of equivalent value— in their estate for that same period.

In addition, the regulations allow heirs to contribute the assets to a newly created entity, such as a company, without losing the reduction. To do so, two essential conditions must be met:

• The entity must continue to carry out the same economic activity as that carried out by the deceased.
• The transaction must not entail a reduction in the acquisition value of the assets. (Binding Ruling 500/19, Directorate General for Taxation and Gambling, of 22 January 2019).

On the contrary, the sale or donation of the properties, as well as the cessation of the economic activity, entails the loss of the tax benefit. It is also lost if the amount obtained from the sale is reinvested in another activity or kept in a financial institution during the required maintenance period.

(Binding Rulings 210E/14, of 24 November 2014, and 324/20, of 11 March 2021, of the Directorate General for Taxation and Gambling.)

In summary

The 95% reduction in Inheritance Tax is one of the most powerful tools to reduce the tax burden on heirs when the deceased carried out an economic activity.

However, its application requires strict compliance with the legal requirements: proving the actual use of the assets in the activity, maintaining the activity for five years, and keeping the properties within the heir’s estate.

When correctly applied, this reduction can represent significant tax savings and an opportunity to ensure the continuity of the family’s economic activity without the tax burden becoming an obstacle.