An agreement as to succession implies a mortis causa transfer and its effects in the different applicable taxes have been harmonised by the Spanish Supreme Court in its ruling dated 9 February 2016. Such agreement as to succession is an instrument through which parties may structure their estate and is legally valid in those Spanish Autonomous Regions with their own civil law dispositions establishing this legal institution.
In essence, through an agreement as to succession, taxpayers are able to structure their inheritance before death by transferring assets with immediate effect but with the tax benefits applicable to inheritances.
This implies that the recipient will be entitled to apply the corresponding Inheritance Tax and Municipal Tax benefits (for instance in relation to transfers of a person’s permanent home). Transferors will also be able to apply, in their Personal Income Tax, the exemption granted to the “transfers for no consideration as a result of an inheritance” (article 33.3.b) of Spanish Law 35/2006, dated 28 November, approving the Spanish Personal Income Tax) to capital gains resulting from the agreement as to succession.
Moreover, this legal institution is particularly advantageous where family businesses are concerned. Thus and as opposed to cases of donations or “gifts” of families businesses, the recipient can acquire such business or the shares in the corresponding company with a step-up to reflect the value of such assets at the time of the agreement as to succession. The resulting tax advantage should there be a subsequent transfer is evident.
However, the above tax benefits will be limited in planned tax reforms, both at state and regional levels:
- At a regional level, the Autonomous Region of Aragon has recently approved a law (Law 10/2018, of 6 September, on Measures related to Inheritance and Gifts Taxes) granting less protection, in terms of taxation, to transfers for no consideration occurring during the transferor’s life as compared to those transfers effectively occurring upon death. Thus, according to Resolution dated 18 October de 2018 by the Aragon General Director General for Taxes, the regional benefits applicable to “mortis causa transfers” will not be available to transfers resulting from agreements as to succession.
- At a State level, the Draft Law of measures to prevent fraud, which was submitted to public consultation on October 2018 includes an amendment to Spanish Personal Income Tax provisions relating to transfers for no consideration resulting from agreements as to succession. Under the terms of this amendment, the beneficiary of an agreement as to succession will value the relevant assets at the same acquisition value and date as the transferor, should there be a subsequent transfer before the death of the original transferor. In other words, should the beneficiary transfer the estate assets before the death of the transferor, the capital gain will be calculated with value and acquisition date of the original transferor, with the corresponding tax impact.
To conclude, although agreements as to succession are an adequate legal instrument to order inheritances during the life of the testator, it is true to say that, both on the regional and state level, an effort is being made to restrict and limit the significant tax advantages available until now. These trends should be borne in mind when considering entering into agreements as to succession.