The succession of a family business is a key moment that defines its continuity and stability. As a firm specialising in tax and inheritance law, we know that proper planning not only protects the business assets but also optimises the tax burden for the heirs. In this article, we address two fundamental aspects: usufruct in business inheritance and inheritance taxes.
Usufruct is a key concept in inheritance planning, especially in family businesses. It is a real right that allows the holder to use and benefit from an asset without being its owner. In the business world, this means that a person can retain the right to receive the profits of the company without altering the ownership of the shares or holdings.
Implications for the management and ownership of the company
The usufructuary is entitled to the economic benefits of the company, such as dividends, but not necessarily to strategic decision-making. In most cases, voting rights at shareholders’ meetings are held by the bare owners (the heirs), unless the company’s articles of association provide otherwise.
Poor planning of this arrangement can lead to conflicts between usufructuaries and bare owners, so it is advisable to establish clear rules on decision-making and company management.
Taxation of family business inheritance
The death of a business owner has significant tax implications that must be considered to avoid an unnecessary tax burden on the heirs.
Inheritance and Gift Tax (ISD)
Inheritance and Gift Tax are levied on the transfer of assets upon death. Its regulation varies depending on the autonomous community in which the deceased resided, so its impact can be very different depending on the territory.
Key aspects of ISD in family businesses
- Tax reductions: A 95% reduction can be applied to the value of the company in ISD, provided that certain requirements are met, such as maintaining the activity for at least five years, the company is not considered to be a holding company, and the transferor performs management functions for which they receive more than 50% of all their income from work or economic activities (this can be met at a personal or family level).
One aspect to bear in mind is that you must ensure that the company’s assets and liabilities are related to the economic activity: if part of them are not, the ISD reduction would only apply, in the event of an administrative check, to the proportionate part related to the activity.
- Taxable base: This is calculated based on the value of the company, minus any outstanding debts and obligations. It must be calculated at market value, taking into account any goodwill that may exist in some cases.
- Allowances: Some autonomous communities offer additional allowances that can significantly reduce the tax burden. Some allowances are incompatible with the 95% reduction for shareholdings in entities.
The correct use of these reductions requires a detailed analysis of the corporate structure and prior planning to avoid problems in succession.
Municipal capital gains tax
When the inheritance includes urban properties, it is necessary to pay the Tax on the Increase in the Value of Urban Land (IIVTNU), known as municipal capital gains tax. This tax depends on the municipality and is levied on the increase in the value of the land from the time of acquisition until its transfer by inheritance.
There are currently two methods for calculating this tax: the objective method (based on coefficients applied to the cadastral value of the land) and the actual method (based on the difference between the actual value—the price established in the public deed—at the time the property was acquired and the time it is transferred. The tax may be paid using whichever calculation method is most economical for the taxpayer.
Personal Income Tax (IRPF)
Inheritance and Gift Tax do not automatically imply personal income tax, but there are cases in which a tax liability does arise:
- If the heir subsequently receives income from the company they inherit, such as dividends.
- If they sell inherited shares, they generate a capital gain.
- In the case of the donation of shares in entities in which part of the assets and liabilities are not related to the activity, the part of the company to which the 95% reduction cannot be applied is subject to personal income tax for the donor (the person making the donation) at the time of the donation, on the capital gain obtained.
- In the case of inheriting pension plans, their redemption is taxed as income from work in personal income tax.
Strategies for optimising the succession of a family business
Taking advantage of tax reductions
The 95% reduction in ISD for family businesses is a key tool for minimising the tax impact of inheritance. To apply it, it is essential that:
- The company is a real economic activity and not merely a holding company.
- At least one of the heirs continues the activity for a minimum period of five years.
- The company has been managed directly by the deceased or by a family member.
Wills and family protocol
To avoid conflicts between heirs and ensure the continuity of the company, it is advisable to draw up a detailed will and, where appropriate, a family protocol regulating:
- The distribution of property and usufruct rights.
- Decision-making in management.
- The incorporation of new generations into the business.
Succession agreements
In some autonomous communities, it is possible to sign succession agreements, which can be used to anticipate the transfer of the business during your lifetime and avoid the tax burden associated with inheritance.
In Catalonia, where the Civil Code allows for succession agreements, cumulative inheritance may be particularly interesting in some cases.
This is a succession agreement that allows you to transfer all your assets during your lifetime (while reserving a few assets to continue your life as normal), allowing you to pay tax at both times as inheritance (at the time of the succession agreement) and not as a gift (at the time of death), and to apply tax reductions and allowances at both times, which, if done jointly at the time of death, would be incompatible with each other. on the one hand, and at the time of death, on the other) and apply tax reductions and allowances at both times, which, if carried out jointly at the time of death, would be incompatible with each other.
Creation of holding companies
In some cases, transferring ownership of the company to a holding company can help structure succession more efficiently and reduce the tax burden.
The creation of a holding company may be advisable in some cases, but it must be analysed in detail, especially in light of recent administrative rulings that reduce the tax benefits of these structures, by making part of the dividends distributed by the operating companies to the holding company transparent to the individual shareholders of the holding company in their personal income tax returns – where they are taxed at a higher rate – in some cases, thereby eliminating one of the main benefits of these structures (the 95% corporation tax exemption on dividends distributed to the holding company).
The success of a family business succession depends not only on the will of the testator, but also on meticulous legal and tax planning. Usufruct can be a useful tool to ensure the stability of the business, but it must be carefully designed to avoid conflicts. In turn, a well-structured tax strategy can significantly reduce the impact of inheritance tax and other taxes associated with inheritance.
At our firm, we help family businesses design effective succession plans, optimising their legal and tax structure to ensure business continuity and protect family wealth. If you are considering planning your business succession, contact us for a personalised consultation.
