The acquisition of a family business under Inheritance and Gift Tax (ISD) can benefit from significant tax reductions if certain requirements are met. One of the most significant is the reduction in the taxable base, which allows the heirs to reduce the taxable value of the family business. At Tecem Abogados, we offer specialized advice in tax and inheritance law, helping our clients to obtain the best tax benefits in Malaga, Benalmadena and the Costa del Sol.

What is the reduction for the acquisition of a family business?

The reduction in the tax base for the transfer of a family business is regulated in Article 20.2.c of the Inheritance and Gift Tax Law (LISD). This tax benefit is granted to the heirs or beneficiaries of a family business, allowing them to reduce the taxable base by a significant percentage, provided that certain requirements are met, among them that the business constitutes the main source of income of the deceased.

Main requirements for applying the reduction

One of the key aspects to apply this reduction is to prove that the economic activity carried out by the deceased was his main source of income. The general rule establishes that the income obtained from the economic activity must be taken into consideration in the year of death. However, in the case of activities whose nature does not generate profits on a regular basis throughout the year (such as farming), the year immediately prior to the year of death can be considered, provided that it is proven that such activity was the main source of income of the deceased in previous years.

Case study: Transfer of a family farming business

In a recent case resolved by the Central Economic Administrative Court (TEAC) on May 30, 2024, the application of this reduction for an agricultural family business was discussed. The heiress claimed the reduction for the transfer of the family business, arguing that the agricultural activity had been the main source of income of the deceased in the years prior to his death. The TEAC applied the doctrine of the Supreme Court (SC 19-11-20, EDJ 729284), which establishes that, in exceptional circumstances such as farms, the income must be assessed in the year prior to death if in that year the requirement was met that the income from the economic activity represented more than 50% of the personal income tax base. In this case, the Court concluded that in the year 2008, the income from the farm exceeded 50% of the taxable base, and therefore the right to the tax reduction was recognized.

Exceptional factors for applying the reduction

The regulations contemplate exceptions in the application of this tax benefit when the nature of the activity makes it difficult to generate profits in the year of death. In agricultural activities, for example, profits are usually obtained in the second half of the year due to the crop cycle. In these cases, it is essential to prove that in previous years the activity was the main source of income.

Advice on family business succession in Malaga and the Costa del Sol

In Tecem Abogados, we have extensive experience in inheritance law and tax advice for the transfer of family businesses. If you are in the process of receiving a family business and would like to know how to optimize your tax burden by reducing the tax base, do not hesitate to contact us. We will help you to take advantage of all the tax benefits available and to comply with the necessary legal requirements for your case. We offer services in Malaga, Benalmadena and all the Costa del Sol, supporting our clients in all areas of inheritance and tax law.