Transfer of a company to family members on retirement

What tax incentives apply to this type of transfer?

For the recipient:

• A reduction in Gift Tax (ISD) if specific requirements are met. In Catalonia, this reduction is 95%.
• An exemption from Wealth Tax (IP) if certain conditions are fulfilled.
• If the gift is between parents and children (Groups I or II in Catalonia), a reduced tax rate of 5% to 9% applies when formalised in a public deed.

For the donor:

• An exemption from Personal Income Tax (IRPF) on the capital gain derived from transferring shares or equity in the family business, provided the relevant conditions are met.

What should I consider to benefit from the tax incentives for transferring a family business?

There are several key aspects to consider, including the donor’s age, cessation of management duties, the company’s operational nature, family ownership thresholds and the performance and remuneration of management functions.

Aspects the donor should consider:

This is a legal mechanism recognised under Catalan civil law and the civil law of certain other autonomous communities (but not under general Spanish civil law). It consists of an agreement executed before a Notary between two or more persons, providing certainty to both parties (the transferor and the recipient) regarding a future inheritance. Unlike a will, it can only be revoked by mutual agreement of all parties, unless otherwise stipulated.

Why might a succession agreement be the right choice compared with gifting shares in your family business?

Because it allows you to reduce or defer taxation, depending on the case.

What tax benefits does a succession agreement offer?

The tax benefits vary depending on the type of succession agreement.

Tax benefits:

If there is no transfer of assets at the time of signing, it guarantees, while the transferor is alive, that the family business shares will become yours upon their death in the agreed proportion, without triggering Gift Tax (inter vivos) at the time of signing. The advantages are as follows:

• No Gift Tax (ISD) is payable when the succession agreement is signed.
• No capital gain is generated for the transferor under Personal Income Tax (IRPF), as the transfer takes place in the future. Likewise, no taxation arises on death because the “capital gain on death” rule does not apply.

If there is a transfer of assets at the time of signing, the shares are transferred immediately, and therefore:

• Inheritance and Gift Tax (ISD) becomes payable, depending on whether the agreement is structured as an heredamiento or a particular attribution.
• Under IRPF, the transferor may avoid taxation if certain requirements are met.

In Catalonia, it is important to take into account the specific rules governing each type of succession agreement:

• Simple heredamiento (no present transfer)
• Cumulative heredamiento (includes a present transfer)
• Particular attribution with present transfer
• Particular attribution without present transfer

What tax benefits apply when inheriting a family business?

The tax benefits are similar to those applicable to gifts. The main difference is that, for the 95% reduction in Inheritance Tax, the transferor’s age requirement does not apply, and the permitted degree of kinship for the beneficiary is extended up to the third degree.

The applicable tax rates and allowances may differ from those applied to gifts. For this reason, each case must be analysed individually to determine the resulting tax impact.

Can I regulate the transfer of my business in my will?

Yes. There are several options to regulate the transfer of ownership and control of your company after your death. In addition to leaving your shares directly to your heirs or legatees, there are other, less common mechanisms that may be useful because they allow certain conditions to be established. Examples include granting your spouse a usufruct over the shares, creating a fiduciary substitution over the shares, establishing a residue trust, allocating control of the company to one or more children, separating management from ownership or preparing instructions in the event of the administrator’s death.

What role does the forced share (legítima) play in the succession of my business?

When planning business succession, if you have several children or descendants, they are entitled to a reserved portion of the inheritance (the percentage varies by region; in Catalonia it is 25%). This may create risks such as the fragmentation of the business, loss of control or management difficulties.

Several options exist to anticipate and mitigate these risks, depending on whether you have already identified the most suitable heir(s) to continue the family business.

If most of the estate consists of company shares and you do not wish to allocate shares to the forced heirs, nor do you wish to grant them other assets, one option is for the designated heir to pay the forced share from their own funds.