The tax trap of abolishing inheritance tax

As we mentioned in our last article, the new Balearic government has announced the abolition of inheritance tax as one of the first tax measures after the regional elections last May.
As a result of the publication of the Decree-Law and the analysis of the fiscal impact on all taxes for individuals, both residents and non-residents, there will be many cases of inheritance and gifts of real estate that will be financially affected by the abolition of regional taxes.
The way the said Decree-Law is currently worded, it could mean that what is saved by this tax will be much more heavily assessed later on when the property is sold and the obligation to pay income tax, both IRPF (residents) and IRNR (non-residents).
The problem is that the conditions of the new law state that in order to benefit from the 100% inheritance tax rebate between parents and children, grandparents and grandchildren, and spouses in the case of transfer of real estate, the value of the real estate “shall in no case exceed the actual value”, adding that this actual value must be the cadastral reference value if this has already been calculated, otherwise it must be the market value.

Since 2022, the cadastral reference value has already been calculated for the vast majority of flats and parking spaces. In most cases, this reference value is significantly lower than the market value. This means that when the property is sold, much more income tax (IRPF) (from 19% to 28%) or IRNR (19%) may be paid than has been saved in inheritance tax.
Before applying the new law, it is highly advisable to conduct a comprehensive tax analysis to find out what is best for the particular taxpayer, as in many cases it may be in the taxpayer’s interest to waive the free inheritance tax (ISD) and sell the house at market value. Even if ISD is paid at 1%, the future tax saving may be greater as there will be no gain on the sale of the property at market value and no IRPF or IRNR will have to be paid.
In addition, for another large number of inheritances, the new approved Balearic rebates are waived, as the condition to indicate the cadastral reference values would complicate the distribution of the inheritance, which could lead to the appearance of the so-called “excess premiums”, which would be taxed as gifts in addition to other taxes.

It should be explained that the new regulation has a good intention, as it aims to ensure that the property received is not inherited at a value far above the market value, which could lead to unrealistic asset losses. However, to avoid these possible scams, it would not be necessary to require that the property be inherited at a maximum value set by the Land Registry, as the IRPF and IRNR regulations provide that for inheritances and gifts, the inherited value must not exceed the market value, so the law already limits the “inflated” value of the property.

Before making an inheritance or gift under the new regulations, it is highly advisable as a taxpayer to conduct a prior tax analysis to determine whether it is more advantageous to apply the new regulations. In tax matters, it is always advisable to seek good professional advice.

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