The succession agreement is an institution of Balearic civil law, governed by the Compilation of Civil Law of the Balearic Islands, which allows assets to be transferred during the lifetime of the deceased with succession effects. Its tax appeal has grown considerably in recent years, but applying it in practice calls for rigorous technical analysis in order to avoid exposure both under the transferor's personal income tax and under the acquirer's inheritance and gift tax.
What is a succession agreement?
In general terms, a succession agreement is a bilateral legal transaction by which the future deceased (the grantor) and the beneficiary agree on the irrevocable transfer of certain assets or rights, taking effect either during the grantor's lifetime or on death. The Balearic Compilation governs several forms: the universal gift of present and future assets, the contractual appointment of an heir, and the definició.
The form most widely used in tax practice is the definició, by which a descendant waives their future forced share in exchange for an allocation of assets during the grantor's lifetime. The definició is specific to Balearic law and has no equivalent in the ordinary Spanish Civil Code.
Treatment under inheritance and gift tax
Inheritance and gift tax charges both acquisitions on death and acquisitions between living persons. The characterisation of the succession agreement for these purposes has been the subject of academic and administrative debate, although the majority position, confirmed by the Directorate General for Taxation in several rulings, is that succession agreements with immediate effect over specific assets are treated as acquisitions on death where they are executed under special or regional civil law.
This characterisation has highly relevant practical consequences: it allows the reliefs and allowances provided for inherited acquisitions under Balearic legislation to be applied (these being significantly more favourable than those available for gifts between living persons), and it fixes the taxable base at the value of the asset at the time of the agreement rather than at the time of death.
Reliefs available in the Balearic Islands
Balearic inheritance and gift tax legislation provides, among others, the following reliefs relevant to acquisitions under a succession agreement treated as acquisitions on death:
- Relief by family relationship (Groups I and II of article 20 of the inheritance and gift tax act), subject to the limits and amounts set out in Balearic regional legislation.
- Relief on the acquisition of a family business or of shares in entities (95%), subject to compliance with the requirements of article 20.2.c) of the inheritance and gift tax act and of the regional legislation.
- Relief on the acquisition of the deceased's main residence (95%), capped at 180,000 euros under Balearic legislation.
Treatment under the transferor's personal income tax
This is the most significant tax question and the one that has generated the most litigation in recent years. Does the transfer of assets under a succession agreement give rise to a capital gain in the transferor's personal income tax?
The general rule in article 33.3.b) of the income tax act
Article 33.3.b) of Law 35/2006 on personal income tax provides that no capital gain or loss is deemed to arise on gratuitous transfers on the death of the taxpayer. This provision gives rise to what is known in Spain as the step-up on death, whereby increases in the value of the deceased's assets go untaxed for income tax purposes on the succession.
The question is whether that exclusion extends to succession agreements with immediate effect, which are executed during the grantor's lifetime, or whether, on the contrary, the transfer between living persons is regarded as giving rise to a capital gain subject to income tax.
Supreme Court doctrine
The Supreme Court, in judgment 407/2016 of 9 February (cassation appeal in the interest of the law 325/2015), held that the transfer of assets under a succession agreement with present effect (in that case, the Galician apartación) does not give rise to a capital gain in the transferor's income tax, since it is a gratuitous transfer on death falling within article 33.3.b) of the income tax act. The Directorate General for Taxation has followed that position in subsequent rulings, among them V0009-22.
However, Law 11/2021 of 9 July, on measures to prevent and combat tax fraud, added a new paragraph to article 36 of the income tax act precisely in order to prevent that exclusion from being used to step up the acquisition value at no tax cost. Since that reform, if the beneficiary of the agreement transfers the assets before five years have elapsed from its execution or before the death of the grantor, whichever occurs first, the beneficiary is subrogated to the grantor's position as regards acquisition value and date, provided that the grantor's value is lower than the value that would result from the inheritance and gift tax rules. In those cases, the gain that was not taxed in the transferor's hands may end up surfacing on the beneficiary's subsequent disposal.
Practical implications
In practice, the income tax charge on the transferor may be reduced or neutralised where:
- The assets transferred have an acquisition cost close to their current market value (limited latent gain).
- The transferor has unused capital losses available for offset.
- The assets transferred are shares in entities whose disposal may qualify for a deferral regime.
- The transferor is over 65 and transfers their main residence (exemption under article 33.4.b) of the income tax act).
Note: This article reflects the position as at the date of publication. The income tax treatment of succession agreements has been subject to continuous administrative and judicial development. Before executing a succession agreement it is essential to carry out an individual analysis taking into account the specific assets, their acquisition value, the transferor's tax position and the reliefs available under inheritance and gift tax. Lex·on does not recommend taking decisions on family assets based on general reading without tailored advice.
Conclusion
The Balearic succession agreement, and the definició in particular, remains a first-rate estate planning tool when used in the right context. The advantages under inheritance and gift tax are clear and, in many cases, greater than those available for ordinary gifts between living persons. The cost under the transferor's income tax must be quantified case by case before any decision is taken. The combination of both effects can be highly efficient overall, but it requires rigorous technical analysis and planning well in advance.
At Lex·on we advise on estate planning and family business succession from Palma de Mallorca and Manacor. If you are considering executing a succession agreement, we can review your specific case before the deed is signed.
Source: Compilation of Civil Law of the Balearic Islands; articles 33.3.b) and 36 of Law 35/2006, of 28 November, on personal income tax, as amended by Law 11/2021, of 9 July; Supreme Court judgment 407/2016, of 9 February.
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This article is for information purposes only and reflects the administrative position in force on the date of publication. It does not constitute legal or tax advice and does not replace an individual analysis of each case.