Succession Agreement: Planning for an anticipated inheritance

An important concern for many homeowners in Ibiza is how their property will be inherited. The covenant known as an “succession agreement” (“el pacto sucesorio“) is a useful instrument that serves to regulate property transmissions between relatives, and it can be treated from a fiscal point of view as an anticipated inheritance. By means of this agreement, the testator can share out his/her legacy amongst the heirs, while s/he is still alive.
However, it is only allowed in certain regions in Spain, which include Aragón, the Basque Country, Galicia, Catalonia and the Balearic Islands. A testament, contrary to a succession agreement, is a unilateral document that depends solely on the will of the person who is issuing it. At any time, the testator can write up new terms for their testament or will, and thus make the previous will invalid. A succession agreement, however, is a contract that depends on the wishes of all the parties who sign, and it is usually irrevocable.

Within it, you can agree the transmission of assets (properties, shares, etc.) while still alive instead of after the testator’s death. Therefore, this formula is often called an “early or anticipated inheritance” (“herencia adelantada“ or “herencia en vida“). When signing this agreement, it is important to bear in mind the following aspects: Between the parties, there must be family ties. The most beneficial transmission when it comes to taxing is the one that happens between first-degree relatives (parents – children). The agreement must be notarized. If one of these parties is of Spanish nationality, s/he must have been a resident in Ibiza for at least ten years. The term applied in this context is “continuous residency” (“vecindad civil“). For non-residents, it is determined by whether the laws in their country of residence include this kind of succession agreement. This is for example the case for Germany, so all German citizens can subscribe and notarize this type of contract in Ibiza.

There are a series of fiscal advantages that the signatories can benefit from. When a property in Ibiza that is valued at up to 700,000 € is passed on in this way to a first-degree relative, they will only have to pay 1% of its value in Inheritance Tax, whereas if it were passed on as a donation the tax would be 7%. Precedent at the Supreme Court equals the succession agreement with a will or testament, and so, when you apply for what is called “added value of the deceased”, you will not have to pay Income Tax for the asset gains. In the case of inheritances, there is generally a 95% rebate of the Tax for Urban Land Value Increase (municipal added value) and so you will only need to pay 5% of the total value. However, application of this fiscal advantage depends on the regulations of each individual municipality. In Ibiza, there are municipalities where residents can benefit from this rebate, but non-residents cannot. Those who have properties worth over 700.000 €, and thus must pay the Property Tax, can reduce the quantity to be paid in tax if they pass on properties through a succession agreement.

An example: The owner of a home in Ibiza who has been living on the island for 30 years wants to transmit to his son, who lives in Germany, his property in Santa Eulalia, which is worth 500.000 €, by means of a succession agreement. The father possesses a net equity of 3 million euros. After discounting the 25,000 € that are exempt, Succession Tax will be 1%. Since the son does not reside in Ibiza, the tax for the succession agreement has to be paid in Madrid. As a general rule, a 95% rebate will be applied to the municipal added value. The father will not have to pay tax from property gains and will be able to reduce a few thousand euros of the Property Tax that has to be paid annually. This example clearly shows how, with the appropriate measures taken at the right time and following professional advice, a considerable amount of tax savings can be achieved.