Inheriting the principal residence
Acquiring the principal residence by inheritance (transfer on death) gives entitlement to a reduction to the inheritance and gift tax base equal to 95 percent of the value of the residence, subject to a €122,606.47 limit under the central government legislation for each heir and a €500,000 limit under Catalan law if certain requirements are met. Because inheritance and gift tax has been transferred to the autonomous community governments, they have a certain amount of legislative capacity.
The beneficiaries of this 95 percent reduction to inheritance and gift tax on acquisition by inheritance of the principal residence are the spouse, predecessors or descendants (including the adopting parents or adopted children) of the deceased person, who need not have lived with the deceased. The only exception concerns collateral relatives aged over 65. These will also be entitled to that 95 percent reduction if they had lived with the deceased for the two years preceding death.
In addition to those requirements, it will be necessary for the heirs to hold the inherited property (they do not have to use it as their principal residence) for the 10 years immediately following its acquisition, unless the heir dies in this period. Under Catalan law this ten-year holding period is lowered to five years. Although in both the central government and the autonomous community legislation, the inherited property must have been the deceased’s principal residence.
The term “principal residence” is not defined in the central government inheritance and gift tax legislation and therefore the definition provided in the personal income tax legislation, which expressly mentions and defines that term, must be used.
Unlike the central government legislation, the Catalan legislation does specifically determine the need to use the definition contained in the Personal Income Tax Law and defines the term “principal residence”. This legislation is more flexible in this regard and determines that if on the date of death the deceased’s effective residence was at a property not owned by that person, the principal residence will be the property that was deemed to be such in the ten years before death (a time limit that does not apply when the deceased’s principal residence was a residential or health care facility).
By contrast, the central government legislation is not so flexible and does not contain this exception. The Supreme Court, however, in a judgment rendered on May 12, 2017, making a ruling on a point of law, determined that an illness that also caused the death of the deceased will be a justified ground by analogy, given that the personal income tax legislation provides that if justified grounds arise for changing residence, they will not cause a property to cease to be deemed the principal residence.
Additionally, although the described requirement laid down by the inheritance and gift tax legislation for the deceased and heir to have lived together if the principal residence is acquired by collateral relatives must be met at the deceased’s residence, because otherwise it would cease to be deemed the principal residence, if there is a justified ground, such as illness, in the Supreme Court’s opinion, the 95 percent reduction could be applied even if the deceased had changed residence to the heir’s home by reason of illness.
Garrigues Tax Department
Article published in Diario de Tarragona