Inheritance Tax in Madrid: the 99% reduction and how to make the most of it

Inheritance Tax in Madrid: Spain’s most favourable regime

The Community of Madrid applies the most favourable Impuesto sobre Sucesiones y Donaciones (ISD, or Spanish Inheritance and Gift Tax) regime of any ordinary-law jurisdiction in Spain. The 99% reduction on the gross tax liability for Groups I and II — which includes descendants, spouse, and ascendants — makes Madrid the autonomous community where inheritance between direct relatives carries the lowest effective cost, in sharp contrast to Catalonia, the Comunitat Valenciana, or the Balearic Islands, where the same estates can generate liabilities of tens of thousands of euros.

However, the reduction is not automatic and does not apply without further action. To benefit from the 99% reduction, heirs must meet the formal requirements set out in Ley 1/2022, of 28 January, on Tax Policy Measures of the Community of Madrid, file the correctly documented self-assessment with the CAM Liquidation Office, and manage the entire estate process within the legally established deadline. A documentation error, an incorrect asset valuation, or missing the six-month deadline can deprive heirs of the reduction or generate surcharges that, paradoxically, exceed the tax liability itself.

BMC manages the Impuesto de Sucesiones in Madrid end to end: from the asset inventory and estate valuation through to filing the self-assessment, defending against any audit by the Consejería de Hacienda, and post-estate planning to optimise the inherited assets.

How the 99% CAM reduction on ISD works

The Community of Madrid’s 99% reduction applies to the gross ISD liability for the following beneficiaries:

• Group I: Descendants and adopted children under 21 years of age.
• Group II: Descendants and adopted children over 21 years of age, registered spouse or civil partner, ascendants and adoptive parents.

For Group III (second- and third-degree collaterals, and ascendants and descendants by affinity) and Group IV (other beneficiaries), the reduction does not apply, and the inheritance is taxed at the general state ISD rate as modified by the CAM. In these cases, the cost can be substantial, particularly for estates between siblings or between aunts and uncles and their nephews and nieces.

The ISD calculation in Madrid with the 99% reduction works as follows:

1. The taxable base of each heir is calculated (value of inherited assets less deductible liabilities and debts).
2. Reductions (both state and regional: family business, primary residence, life insurance, etc.) are applied to arrive at the net taxable base.
3. The ISD rate is applied to the net taxable base to produce the gross liability.
4. The multiplier coefficient is applied (which may increase the liability depending on the heir’s pre-existing wealth).
5. Finally, the 99% reduction is applied, leaving only 1% to pay.

For an estate between a parent and child in Madrid worth 400,000 euros (a flat in central Madrid), the effective final liability after the 99% reduction is typically below 2,000 euros, compared to 50,000 to 80,000 euros that the same estate might attract in other autonomous communities.

Most important reductions under Madrid’s ISD

In addition to the 99% reduction, Madrid rules allow the following reductions that lower the net taxable base before the liability is calculated:

Kinship reduction

The state ISD rules establish general kinship reductions applied before the tax rate:

• Group I: 15,956.87 euros plus 3,990.72 euros for each year below age 21, up to a maximum of 47,858.59 euros.
• Group II: 15,956.87 euros.
• Group III: 7,993.46 euros.
• Group IV: No reduction.

Family business reduction (article 20.6 LISD)

The 95% reduction on the value of shares in family businesses is one of the most significant reliefs available under the ISD. To apply it, the following conditions must be met:

• The company must carry on a genuine economic activity (not merely hold assets such as rented properties without business organisation).
• The deceased or a member of the family group must exercise genuine management functions in the company and receive more than 50% of their total employment and business income from that activity.
• Family-group shareholdings must represent at least 5% individually (or 20% jointly with the spouse, ascendants, descendants, and collaterals up to the second degree).
• Heirs must retain the business assets for at least 10 years from the date of death (under state rules; the CAM may have established different periods).

The combination of the 95% family business reduction and the CAM’s 99% reduction can result in a Madrid family business transferring with a total fiscal cost close to zero.

Primary residence reduction

Where an heir inherits the deceased’s primary residence, a reduction of up to 95% of the property’s value is available, capped at 123,000 euros per heir. This reduction requires the heir to be the spouse, ascendant, descendant, or a collateral over 65 who shared the property with the deceased for the two years prior to the death, and the heir must retain the property in their estate for three years.

Life insurance reduction

Beneficiaries of life insurance policies who are the spouse, ascendant, or descendant of the deceased can apply a reduction of 100% of the proceeds received, up to a cap of 9,195.49 euros. This reduction is available individually to each beneficiary, regardless of the total insurance amount.

Inheritance Tax and the Madrid family business

Madrid has one of the highest concentrations of family businesses in Spain, ranging from SMEs in distribution, construction, and hospitality to industrial and professional-services companies with multi-million euro turnovers. The generational transfer of these businesses is one of the most complex and economically significant fiscal processes that BMC manages.

Correctly applying the 95% reduction under article 20.6 LISD requires a thorough prior analysis of the corporate structure: if the company holds non-business assets (excessive liquidity, properties not used in the business, shareholdings in other companies), the reduction may not apply to that portion of the value. In these cases, it is advisable to restructure the business assets before the death to maximise the value on which the 95% reduction applies.

Where a lifetime transfer is possible, donating business shares can also qualify for the 95% reduction and the CAM relief, provided the same conditions are met as for inheritance. BMC assesses in each case whether a lifetime transfer (by gift or succession agreement) or a transfer on death is the more advantageous route from both a fiscal and family perspective.

Deadlines and procedure with the CAM Consejería de Hacienda

The deadline for filing the ISD self-assessment with the Community of Madrid’s Consejería de Hacienda is six months from the date of death. This deadline can be extended by a further six months if the extension request is submitted before the fifth month after the death.

If the deadline passes without the self-assessment being filed, late-filing surcharges apply:

• 1% per month for each month of delay up to 12 months from the filing deadline.
• 15% for delays over 12 months, plus interest.
• Additional penalties if the administration identifies the estate before the heir files (up to 150% of the unpaid tax).

Because the 99% reduction makes the effective liability very low, late-filing surcharges can easily exceed the tax itself. This makes it especially important to manage the estate promptly and within the legal deadline.

Filing is made at the CAM Consejería de Hacienda Liquidation Office for the municipality where the deceased was resident or, for real property assets, the municipality where the assets are located. BMC manages the entire filing procedure, including obtaining the required documentation (bank certificates, Land Registry notes, valuations) and communicating with the Consejería in the event of any subsequent review or audit.

Inheriting real property registered in Madrid

Inheriting real property in Madrid requires, in addition to settling the ISD, registering the properties in the heirs’ names at the Land Registry. This requires presenting the deed of acceptance and partition of the estate (or the private partition schedule where permissible) together with the ISD payment receipt.

Since Ley 11/2021 on measures to prevent and combat tax fraud, real property must be valued at the cadastral reference value (valor de referencia catastral) as the minimum taxable base for ISD and Transfer Tax (ITP). If the market value is below the reference value, the heir can challenge it, though the burden of proof rests on the heir to demonstrate the lower real value. BMC assesses in each case whether challenging the reference value is appropriate and manages the corresponding procedure.

Why choose BMC to manage ISD in Madrid

BMC is a specialist tax advisory firm with a presence in Madrid and a proven track record in managing Inheritance Tax for Madrid families with business and real estate assets. Our team includes specialists in tax planning, succession law, and family business valuation.

Unlike general accounting firms that simply file Form 650, BMC analyses each estate as a whole: we identify all available reductions, optimise the distribution of the estate among heirs to minimise the total tax burden, and plan the post-estate fiscal implications for income tax (IRPF) and Wealth Tax (Impuesto sobre el Patrimonio).

The initial consultation is free and without commitment. Within 48 hours we provide an estimate of the ISD and the applicable reductions.

BMC has an office in Madrid. Visit our Madrid office for a local, personal service.