B Law & Tax
06 March 2024

The Supreme Court ensures tax benefits in inheritances with usufruct: key judgment for legal certainty

The Supreme Court (TS) has issued a decision of great significance regarding taxpayers affected by inheritances involving usufruct, a situation representing the majority of cases according to statistics provided by the General Council of Notaries (CGN). Contrary to the stance held by certain regional tax authorities, the Supreme Court has bolstered the tax benefits associated with these inheritances, thereby invalidating the previously unfavorable tax treatment administered when extinguishing usufruct, i.e., when the heir assumes full control of the assets.

This ruling, which nullifies the unfavorable tax regime applied by the Balearic Tax Office under such circumstances by disallowing the application of tax benefits in force at the time of the deceased’s passing, also prevents any potential fiscal detriment to these heirs nationwide, in response to pressures for harmonizing and eliminating incentives in the Inheritance and Gift Tax (ISD).

As a result, tax benefits in effect at the time of the deceased’s passing will apply upon extinguishing the usufruct, even if they have been repealed by subsequent legislation. The Supreme Court thus dismisses the possibility of a reform in the IGT enacted after the deceased’s passing but before the usufruct’s extinguishment resulting in harm to the heirs upon assuming full control of the assets following the death of the other spouse who enjoyed the usufruct.

In this regard, given that most autonomous communities offer deductions or incentives in the Inheritance and Gift Tax for direct familial inheritances, it is crucial for heirs to be aware that when consolidating ownership of the assets, they must calculate and pay the Inheritance Tax based not only on the value of the usufruct but also on the deductions and incentives in force at the time of the deceased’s passing, even if they are no longer in force upon the usufructuary’s death.

The Supreme Court’s judgment establishes that the tax regulations applicable when the heir acquires full ownership of the asset due to the extinguishment of the usufruct are the same as those in force at the time of the dismemberment of ownership, without taking into account subsequent regulatory changes regarding deductions or incentives on the tax base due to the consolidation of ownership. This is done to avoid violating the principle of legal certainty.

The judgment also notes that in these inheritances there is a single taxable event and a single accrual, even though part of the settlement is delayed until the usufruct’s extinguishment. Therefore, the application of all relevant regional regulations at the time of the deceased’s passing, including regional tax benefits, is required so as not to violate the principle of legal certainty.

The specific case in the Balearic Islands involved a tax rate ranging from 7.65% to 34% to calculate the inheritance tax until December 31, 2015, with a regional deduction capping taxation at 1%. From January 1, 2016, this deduction was eliminated, and a new progressive rate from 1% to 20% was introduced for inheritances among direct relatives.

In conclusion, the Supreme Court’s decision represents a significant milestone in the taxation of inheritances with usufruct, ensuring the application of tax benefits in force at the time of the deceased’s passing and establishing clarity and certainty in the tax treatment of these situations for heirs.

B Law & Tax International Tax & Legal Advisors.

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