Inheritance Tax in the Canary Islands: Spain's most generous 99.9% relief

Inheritance Tax in the Canary Islands: the most generous relief in Spain

The Canary Islands hold the record for fiscal generosity on Inheritance Tax among all Spanish autonomous communities. The 99.9% relief on the ISD (Impuesto sobre Sucesiones y Donaciones) full tax liability for Groups I and II makes inheritances between parents and children and between spouses in the Canaries virtually free from a tax perspective. Just 0.1% of the calculated tax is payable: on an inheritance whose tax liability would be 50,000 euros according to the rate table, the amount due is just 50 euros.

This generosity of the Canarian ISD contrasts with the Wealth Tax (Impuesto sobre el Patrimonio) regime on the islands, which does not carry the 100% relief applied in Madrid and Andalusia. The Canaries charge IP at rates of 0.24%-2.50%, generating a real tax liability for estates exceeding the minimum exemption. This combination, virtually nil ISD and a real IP liability, defines a particular fiscal profile for the Canary Islands that sets them apart from Madrid and Andalusia (where both taxes carry high reliefs).

For Canarian families, estate and succession planning must take into account this duality: while the transfer of wealth on death is virtually free, maintaining that wealth during one’s lifetime generates an annual cost through IP. Strategies to minimise IP (family business structures, exemptions, estate planning) are therefore more important in the Canaries than strategies to minimise ISD, which is already negligible.

The 99.9% relief: mechanics and practical application

The 99.9% Canarian ISD relief for Groups I and II is applied to the full tax liability after applying the rate table and the multiplying coefficient. The full calculation process is as follows:

1. Taxable base: value of the estate received by the heir.
2. Reductions: parentage reduction (23,125 euros for Group II), family business reduction (95%), deceased’s primary residence, life insurance, disability of the heir.
3. Reduced taxable base.
4. Full tax liability according to the Canarian rate table.
5. Multiplying coefficient based on the heir’s pre-existing wealth.
6. Tax charge.
7. 99.9% relief: applied by deducting 99.9% of the tax charge.
8. Amount payable: 0.1% of the tax charge.

For an estate of 1,000,000 euros passing from parent to adult child in the Canary Islands (Group II, no family business):

• Parentage reduction: 23,125 euros
• Reduced taxable base: 976,875 euros
• Full tax liability (Canarian rate table): approximately 120,000 euros
• Multiplying coefficient (heir with modest prior wealth): 1
• Tax charge: 120,000 euros
• 99.9% relief: -119,880 euros
• Amount payable: 120 euros

For an estate of 1,000,000 euros, the Canarian ISD charge is 120 euros. The same estate in Catalonia (25% relief) would generate approximately 90,000 euros of tax. The difference is close to 90,000 euros.

Family businesses under the Canarian ISD: a near-zero cost transfer

For Canarian family businesses, of which the hotel sector is the most representative but which also includes companies in retail, transport, services and agricultural exports, the combination of the 95% family business reduction and the 99.9% ISD relief makes the inheritance of the business virtually free.

The numbers illustrate this clearly. For a family hotel chain in Fuerteventura valued at 10,000,000 euros, transferred from parents to adult children in the Canaries:

1. Value of the shareholdings: 10,000,000 euros
2. Family business reduction (95%): -9,500,000 euros
3. Taxable base for the business: 500,000 euros
4. Full tax liability on that base: approximately 55,000 euros
5. 99.9% relief: -54,945 euros
6. Final tax on the business: approximately 55 euros

For a 10,000,000 euro business, the Canarian ISD charge on the business element is 55 euros. Without the 95% reduction (but with the 99.9% relief), the charge would be approximately 600 euros. The family business reduction is almost irrelevant in the Canaries from the ISD liability perspective, given that the 99.9% relief already reduces the charge to a negligible amount with or without the 95% reduction.

However, the 95% family business reduction remains important in the Canaries for another reason: Wealth Tax (Impuesto sobre el Patrimonio). Since the IP family business exemption and the 95% ISD reduction share the same requirements under article 4 of the IP Act, maintaining a well-structured family business simultaneously optimises the annual IP charge (which does carry a real cost in the Canaries) and the ISD at the time of succession.

The REF canario and succession planning

The Régimen Económico y Fiscal de Canarias (REF canario, Canary Islands Economic and Tax Regime) offers instruments that, while not directly affecting the ISD, form part of the integrated fiscal planning of Canarian business families.

Zona Especial Canaria (ZEC). Entities registered under the ZEC are taxed at 4% Corporation Tax on profits from eligible activities. Accumulating profits in a ZEC entity at a reduced rate can significantly increase the value of shareholdings over time. Given that the inheritance of those shareholdings (where they meet the family business requirements) is virtually free under the Canarian ISD, the ZEC and the Canarian ISD complement each other perfectly for families seeking to accumulate and transfer business value across generations.

Reservas para Inversiones en Canarias (RIC). Self-employed individuals with business activity in the Canaries can reduce their IRPF taxable base by establishing a Canary Islands Investment Reserve, which must be materialised in productive assets in the archipelago within the following 5 years. The RIC contributes to accumulating business assets in the owner’s estate that, when transferred by inheritance, benefit from the family business reduction and the 99.9% ISD relief.

Canary Islands investment deductions. Both Corporation Tax and IRPF carry specific deductions for investment in productive fixed assets in the Canaries (a Canarian investment deduction of 25%, compared with the general rate of 5%-8%). These deductions increase the net return on investments in the islands and contribute to the growth of the business estate that will eventually pass to the next generation.

Inheritances in the Canary Islands involving overseas assets

The Canary Islands attract a significant number of international residents, particularly from Germany, the United Kingdom and other northern and central European countries, who value the climate, quality of life and relatively favourable tax environment of the archipelago. When these international residents pass away, their estates may include assets in multiple countries: real estate in Germany, bank accounts in the United Kingdom, shareholdings in companies in the Netherlands.

Spanish ISD (settled in the Canaries if the deceased was resident on the islands) taxes the deceased’s overseas assets, but double taxation treaties on inheritance matters may prevent double taxation. Spain has inheritance treaties with certain countries (France, Sweden, Greece), but not with Germany, the United Kingdom or most of the countries of origin of Canarian residents. In the absence of a treaty, the international double taxation credit may apply.

Coordinating between the Canarian ISD and foreign inheritance taxes is complex and requires specialist advice. At BMC we manage the international estates of residents in the Canary Islands, coordinating with our correspondents in Germany, the United Kingdom and other countries to ensure that heirs comply correctly in all jurisdictions and that double taxation is minimised within the legal framework.

Municipal capital gains tax in the Canary Islands: specific considerations

Where an estate includes real estate in the Canaries, the ISD settlement is accompanied by the municipal capital gains tax (Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana, IIVTNU) levied by the municipal councils on the islands. The particularities of the Canarian property market, with significant appreciation in coastal tourist municipalities, mean that the municipal capital gains tax can be material in some inheritances.

As in the rest of Spain, since the IIVTNU reform of 2021, the taxpayer may opt for the objective method (using the coefficients approved by the municipality) or the actual-gain method (using the difference between the land value at the time of acquisition and at the time of the inheritance). In Canarian municipalities with high property appreciation, the objective method may produce a higher charge than the actual increase in land value, making a comparison of both methods necessary.

The Canary Islands Government publishes information on the Canarian ISD on the website of the Agencia Tributaria Canaria.