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Inheritance Tax in the Balearics: Hasta la Vista

In November 2023, the Balearic Parliament passed the law that provides for an exemption from inheritance tax between parents and children, grandchildren and grandparents as well as spouses. Gifts to children and grandchildren for their permanent residence will also be cancelled.

Inheritance tax will also be reduced by 50% in the case of inheritances between siblings or between nephews and uncles if they have no descendants, or by 25% if there are direct descendants in these cases.

The drafting of Decree 4/2023 in July was used as an opportunity to correct some serious errors, such as the discriminatory treatment of descendants who are not resident on the islands.

1. Inheritances between parents and children, spouses and grandparents and grandchildren or great-grandchildren 

The tax does not apply to any inherited assets and loses its previous progression from 700,000 euros.

2 What has been paid so far? 

Until the Governor’s law came into force, parents and children, spouses and grandparents and grandchildren or great-grandchildren paid 1% if the inheritance did not exceed 700,000 euros, i.e. the tax relief was 99%. From this amount, the rate increased progressively to 8%, 11%, 15% and finally to 20%, depending on the inherited assets.

3. Inheritances between siblings or between uncles and nephews 

These taxes are reduced by 50% if the heirs are siblings or uncles and nephews, if there are no direct descendants, and by 25% if there are direct descendants.

4 What has been paid so far?

 For these heirs, the applicable rate before this govern reform was between 7.65% and 34%, depending on the value of the inherited assets less debts.

5 What applies to non-residents?

The new text has corrected the part of the law that was in breach of EU law as it discriminated against non-residents. This meant that if a Mallorcan father left his assets to several children or a grandfather had several grandchildren living in Spain, they were exempt from inheritance tax, while those living in Germany or the UK still had to pay tax. This point has been corrected.

6. Obligation to declare the value of the property in the deeds with a maximum increase of 20% 

The value of the property must be indicated in the public deed (Acceptación de Herencia) when it is acquired, which in no case may exceed the reference value by a maximum of 20%. If there is no reference value or it cannot be certified, the market value will be taken into account. According to Vice President Antoni Costa: “The intention of this government is to avoid artificial increases in the value of properties aimed at avoiding income tax (IRPF) when the property is later sold by the heir.”

Tax tip: In cases where the application of the multiplier of 1.20 to the reference value results in the value of the property being significantly lower than the market value, the alternative of waiving the now introduced exemption from inheritance tax and applying the non-reduced tax rate will be considered (see point 2).

7. The reference value for real estate will be retroactive to 18 July The changes regarding the reference value will be retroactive to 18 July, when Decree 4/2023 came into force (in the July decree, the reference value was adopted without increasing it by 20%). The Cabinet Minister explained that this also applies to cases in which taxpayers have already submitted a self-declaration in accordance with the version of the July Decree Law: “If the tax benefit has been improved by the final formulation, the amendment of the self-declaration can be requested.”

8. The taxation of gifts of real estate to form the main residence (main domicile) is abolished 

The taxation of gifts of real estate intended to serve as the domicile of the recipient is abolished if the recipient is a child or descendant of the donor. If the donee is the holder of an extended family certificate or has a physical disability of at least 65% or a mental disability of at least 33%, it is not necessary for it to be the first main residence. In addition, the tax on gifts to descendants for the acquisition of the first main residence is abolished. The limits on the assets or age of the donee or the amount of the gift will also be abolished.

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