Inheritance Tax in the Balearic Islands: no 99% reduction means advance planning is essential

Inheritance Tax in the Balearic Islands: without the advantage that Madrid or Andalucia offer

The Balearic Islands are, alongside Catalonia and the Valencian Community, one of the autonomous communities where Inheritance and Gift Tax (Impuesto sobre Sucesiones y Donaciones, ISD) generates a real and significant burden for direct-line heirs. Unlike Madrid (99% reduced), Andalucia (99% reduced since 2022) or Canarias (99.9% reduced), the Balearic Islands do not apply a general reduction that effectively eliminates the ISD. Heirs in Group II (children aged 21 or over, spouse, ascendants) are taxed under the regional Balearic rate scale with the available kinship allowances but without a reduction that makes the tax negligible.

This situation is particularly relevant given the Balearic real-estate market. Property prices in Mallorca, Ibiza and Formentera are among the highest in Spain: a family home in central Palma de Mallorca may be worth 800,000 euros; a country estate in the island interior, several million; and a villa in Ibiza or Formentera can exceed 10,000,000 euros in the luxury segment. These high taxable bases, applied against regional rates with no comprehensive reduction, generate ISD bills running to tens or even hundreds of thousands of euros.

The contrast with other regions is stark: the same inheritance that in Madrid would generate a bill of around 500 euros can generate a bill of 40,000 to 80,000 euros or more in the Balearic Islands. This differential makes advance succession planning an especially urgent need for island residents with significant wealth.

The Balearic ISD rate scale and available reductions

The Agencia Tributaria de les Illes Balears (ATIB) administers the Balearic ISD. The regional rate scale ranges from 1% for the lowest brackets up to 20% for amounts above 800,000 euros of net taxable base. Unlike other regions, the Balearic Islands have not reduced the rates for direct-line heirs, so the scale applies in the same way across all groups (with the differences arising from kinship allowances and the multiplier coefficient based on the heir’s existing wealth).

The most significant reductions in the Balearic ISD are:

Kinship allowance: The Balearic Islands set their own allowances by kinship group. For Group I (descendants under 21) the base allowance is 25,000 euros plus 6,250 euros for each year the heir has left until reaching 21. For Group II (children aged 21 or over, spouse, ascendants) the allowance is 25,000 euros. These allowances exceed the national standard but fall well short of what other regions offer.

Primary-residence allowance: The Balearic Islands have extended the cap on the 95% primary-residence allowance to 1,000,000 euros (compared to the national cap of 300,000 euros and the Catalan cap of 500,000 euros). The heir must be a spouse, descendant or ascendant and must retain the property for at least 5 years. This extension is particularly relevant in a market where family home values routinely exceed the national 300,000-euro threshold.

Family-business reduction: As in the rest of Spain, shareholdings in companies meeting the requirements of article 20.6 LISD qualify for a 95% reduction in the taxable base. This reduction is fundamental for the transfer of the hotels, restaurants, retail businesses and professional-services companies that form the core of the Balearic economy.

Life-insurance allowance: Life insurance policies in favour of a spouse, ascendants or descendants qualify for a reduction of up to 9,195 euros per beneficiary. This is modest relative to the policy values typically needed to cover ISD liabilities.

The liquidity problem: when the inherited estate generates no immediate cash

One of the main practical problems with inheritances in the Balearic Islands is lack of liquidity. Families inheriting primarily real estate (a villa in Ibiza, a finca in Mallorca, a flat in central Palma) can face an ISD bill of tens of thousands of euros that cannot be paid from available cash, because the inherited estate is by nature illiquid.

The main solutions to this liquidity problem are:

Deferral and instalment payment of the ISD. ATIB allows deferral or instalment payment of the ISD, provided the heir offers suitable guarantees (a mortgage over the inherited property, a bank guarantee). The typical maximum deferral is one year, with further extensions in justified cases, and interest accrues at the legal rate. For heirs who wish to retain the inherited property, this is the most common solution.

Bank financing for ISD payment. Banks offer specific financing products for ISD payment, including mortgages over the inherited property. The monthly mortgage repayment is often lower than the rental income that could be obtained from the property, making the strategy of financing the ISD with a mortgage and servicing it from rental income viable in the Balearics, where tourist or residential rental yields are high.

Life insurance to fund the ISD. Advance planning through life insurance policies with named beneficiaries, sized to cover the estimated ISD liability, is the most elegant wealth-planning solution. Life insurance proceeds paid to named beneficiaries fall outside the estate in civil law terms (they are paid directly to the beneficiary outside the inheritance), providing the liquidity needed to pay the ISD. They also qualify for the Balearic ISD allowance of up to 9,195 euros per beneficiary.

Comparative table: ISD in the Balearic Islands vs. other regions

The following table illustrates the difference in ISD burden for an inheritance of 800,000 euros from parent to adult child (excluding family-business and primary-residence reductions) across the main autonomous communities:

This difference of approximately 70,000 euros between inheriting in Madrid and inheriting in the Balearic Islands on an 800,000-euro estate is one of the strongest arguments for advance ISD planning for Balearic residents.

International inheritances in the Balearic Islands: non-residents and foreign deceased

The Balearic Islands have a high proportion of foreign residents and property owners, particularly Germans, British nationals and citizens of other central European countries. International inheritances, where the deceased or one or more heirs is not resident in Spain, carry additional complexity requiring coordination between the Spanish ISD and the succession tax rules of the country of origin.

For a non-resident foreign national who dies leaving a property in Mallorca, the question is whether Spanish ISD or the tax of the deceased’s country of residence applies. EU Regulation 650/2012 provides that the law applicable to the succession is that of the country where the deceased was habitually resident at the date of death (with the option of choosing the law of the deceased’s nationality if indicated in the will). However, Spanish ISD applies to assets located in Spain regardless of which succession law governs the distribution of the estate.

For non-residents in Spain who inherit assets in the Balearic Islands from a deceased who was also non-resident, the ISD is settled before the relevant AEAT office (not before ATIB), applying the rules of the community where the assets are located. If the assets are in the Balearic Islands, Balearic ISD rules apply.

BMC manages international inheritances in the Balearic Islands by coordinating with tax advisers in Germany, the United Kingdom, Austria and other countries to avoid double taxation and ensure full compliance with all tax obligations in each jurisdiction.

ATIB publishes up-to-date information on the Balearic ISD at atib.es.

BMC has a presence in the Balearic Islands. Find out about our Balearic Islands representation for local, dedicated support.