Estate management: For the purposes of considering that the leasing activity is carried out as an economic activity, can an employee have more than one full-time job?

When a family member who carried out an economic activity —for example, the leasing of real estate— passes away, their heirs must manage not only the assets, but also the tax matters surrounding the inheritance. One of the most relevant aspects is the 95% reduction in Inheritance and Gift Tax, provided for assets used in an economic activity.

However, applying this benefit is not automatic: the regulations require compliance with a series of very specific requirements, including having at least one employee with an employment contract on a full-time basis. And it is precisely this point that tends to generate the most controversy.

Could that employee have more than one full-time job? The answer, according to the Directorate General for Taxation (DGT), is no. If that is the case, what would be the consequences for the 95% reduction in Inheritance and Gift Tax?

The requirement of a full-time employee

Both Personal Income Tax (IRPF) regulations, and by extension those of Wealth Tax and Inheritance Tax, establish that for an individual to be considered the holder of an economic activity consisting of the leasing of real estate, they must have at least one employee with an employment contract on a full-time basis.

This is stated, among others, in Binding Ruling V0085-23, of 23 January 2023, issued by the Directorate General for Taxation:

“The requirement that at least one person be employed under an employment contract and on a full-time basis shall only be deemed to be met if such contract is classified as an employment contract under the applicable labour legislation and is full-time.”

This means that:

• The contract must be a genuine employment contract, not a commercial relationship or a collaborating self-employed individual.
• The owner cannot “hire themselves”.
• It is not sufficient to have two part-time employees (Binding Ruling V1437-18, of 29 May 2018).

In short, there must be a full-time employee who effectively manages the rental activity.

What happens if the employee has another full-time job?

Here we reach the most controversial and relevant point. It may happen that the employee also has a full-time employment contract with another company.

From a labour law perspective, this is not illegal: multiple employment is permitted, even with two full-time contracts, provided that rest periods and working hours are respected. However, from a tax perspective, the Directorate General for Taxation does not accept it.

In a binding ruling, the Directorate General for Taxation expressly ruled that if an employee has two full-time employment contracts with two different companies, the requirement laid down in Article 27.2 of the Personal Income Tax Law (Law 35/2006) is not met in order to consider that there is an economic activity in the leasing of real estate.

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

Consequently, we would not be dealing with an activity that is considered an economic activity.

What are the consequences for the application of the 95% reduction in Inheritance and Gift Tax?

The direct consequence is that the properties will not be able to benefit from the 95% reduction in Inheritance Tax, and therefore it cannot be applied to the value of the properties.

Conclusion

For tax purposes, the same employee cannot have two full-time jobs and still meet the requirement needed to consider the existence of an economic activity. This criterion, although debated in academic doctrine, is binding on the Tax Administration and must therefore be borne very much in mind when managing an inheritance involving leased properties.

In summary:

• If the deceased did not have an employee with an employment contract on a full-time basis, or if that employee held more than one full-time job, the activity will not be considered an economic activity.
• Consequently, in both cases, the 95% reduction in Inheritance Tax will not be applicable.

For this reason, before processing the inheritance or maintaining the leasing activity, it is essential to carefully review the employee’s employment and tax situation.