Estate and Succession Planning

Succession and inheritance in the Balearic Islands

Passing family wealth on at death is subject to Spanish inheritance and gift tax, a levy devolved to the autonomous communities whose rules vary considerably from one region to another. The Balearic Islands have their own regime, with reliefs and allowances that only work if the position has been planned and documented in advance.

At Lex·on we handle the inheritance tax return (for heirs resident in Spain and for those resident abroad alike), the municipal capital gains tax on urban land, and the reporting of any capital gains arising in the deceased's personal income tax position from assets not previously declared or still to be adjusted.

Estates involving non-residents

Where an heir or the deceased is not resident in Spain, the inheritance tax position needs particular care: identifying which rules apply, state or regional, working to different deadlines and, in many cases, coordinating with the tax treatment in the heir's country of residence. We have specific experience with cross-border estates, particularly involving residents of Germany, the United Kingdom, France and the Nordic countries.

Lifetime gifts and transfers

A lifetime gift is a first-rank planning tool when it is used properly. The Balearic Islands provide specific reliefs for gifts of the main residence and of businesses or shareholdings, which can bring the tax cost of a transfer well below that of an inheritance.

Every gift does, however, trigger a capital gain in the donor's personal income tax on the difference between the transfer value and the acquisition cost of the asset given. Coordinating inheritance and gift tax with personal income tax is essential in order to work out the overall tax cost and to establish whether a gift is the best route or whether more efficient alternatives exist.

Balearic succession agreements

Balearic civil law recognises the succession agreement as an institution of its own, governed by the Compilation of Balearic Civil Law. Its main tax attraction is that a transfer made under a succession agreement can be taxed with the reliefs available for acquisitions on death, and in certain cases avoids triggering a capital gain in the transferor's personal income tax.

The Spanish Supreme Court and the tax authorities have both issued significant guidance on how succession agreements are taxed, particularly as regards the later disposal of assets acquired in this way. We advise both at the planning stage and on the tax position once the agreement has been executed.

For a detailed analysis, see our article: Taxation of Balearic succession agreements.

Wealth tax and the solidarity levy

Spanish wealth tax, and the temporary solidarity levy on large fortunes that now sits alongside it, charges the ownership of assets and rights with a net value above certain thresholds. Valuing the assets correctly, whether property, shareholdings or investment portfolios, and applying the available exemptions and reliefs can make a very significant economic difference.

The family business exemption matters particularly: it removes from the charge the value of shareholdings in entities meeting the statutory conditions, provided the business activity is the taxpayer's main source of income and management functions are genuinely carried out.

Family business: relief and continuity

The 95% inheritance and gift tax relief on the acquisition of family businesses and shareholdings is among the most valuable benefits in succession planning. Its availability is conditional on precise requirements, both at the time of acquisition and throughout the following five years; failure to meet them results in the relief being withdrawn retrospectively, with late-payment interest.

We assess whether the corporate structure qualifies, advise on the changes needed to meet the statutory conditions and see the transfer through to completion. For a detailed review of the requirements, see our article: 95% inheritance tax relief for family businesses.