The inheritance contract as anticipated inheritance

Succession planning is one of the main concerns of many property owners in Ibiza.

The contract of inheritance ( pacto sucesorio) is an interesting instrument for regulating the transfer of assets within the family, as the contract of inheritance can be structured as an anticipated inheritance for tax purposes. Parts of the inheritance can thus be distributed to the heirs during their lifetime by means of a contract.

However, the inheritance contract is only permitted in certain autonomous regions of Spain, including Aragon, the Basque Country, Galicia, Catalonia and above all the Balearic Islands. The will, unlike the contract of inheritance, is a unilateral document which depends solely on the will of the signatory. If he or she changes his or her mind, he or she can always draw up a new will which cancels the previous last will and testament. The contract of inheritance, on the other hand, is a contract and depends on the will of all the parties and is usually irrevocable.

The contract of inheritance may provide that assets (real estate, shares, etc.) are to be transferred during the lifetime of the deceased. Therefore, this form of inheritance contract is also called an anticipated inheritance (“adelantado de la herencia”). The following points must be observed when concluding the inheritance contract: The contracting parties must be related. From a tax perspective, the ideal constellation is that of direct relatives (parents, children). The inheritance contract must be notarised. If one of the signatories is Spanish, he must have lived in Ibiza for at least 10 years. In this context, one speaks of the civil law territorial affiliation (“vecindad civil”). In the case of non-residents, it depends on whether the inheritance contract is also legally regulated in their home country. This is the case in German civil law, for example, so that German citizens can have an inheritance contract notarised in Ibiza.

There are a number of tax advantages that apply after the conclusion of the inheritance contract. When transferring a property on Ibiza by means of an inheritance contract, direct relatives with a value of up to € 700,000 only have to pay 1% inheritance tax, whereas a normal gift would be subject to 7% gift tax. According to the highest court jurisdiction, the contract of inheritance is equated to inheritance, so that no profit tax is payable here within the framework of income tax (so-called “plusvalia del muerto”). As a rule, the municipal tax on capital gains (“plusvalia municipal”) provides a 95% bonificación for inheritances, which means that only 5% of the total plusvalia taxes are payable. In this case, however, the respective municipal ordinance applies in each individual case. In practice, certain municipalities in Ibiza apply the bonificación only to residents and not to non-residents. Those persons who already pay wealth tax can reduce their wealth tax by transferring assets through the inheritance contract. Wealth tax is applied to assets of €700,000 or more.

Example: A resident homeowner who has been living in Ibiza for 30 years transfers a property located in Sta. Eulalia with a value of € 500,000 to his son, who lives in Germany, by way of a contract of inheritance. The father has net assets of 3 million euros. The inheritance tax is 1% after deduction of the tax-free amount of 25,000 €. Since the son is non-resident in Ibiza, the inheritance contract has to be taxed in Madrid. As a rule, there should be a 95% reduction on the municipal plusvalia tax. The father does not have to pay tax on any profits and he can reduce the annual property tax by several thousand euros. This case study clearly illustrates that tax money can be saved in the end by timely design and advice.