Beneficiaries of improvement pacts will subrogate the value and acquisition date of their parents

The legal nature of improvement pacts (pactos de mejora), which are especially frequent in Galician civil law, has raised doubts about how to calculate capital gains for Personal Income Tax (IRPF) when the beneficiary decides to sell the received asset. The Directorate General of Taxes (DGT) has issued a ruling that defines the tax treatment of these transfers.

What the DGT has resolved

The DGT determines that the transfer of assets through an improvement pact constitutes a lucrative transfer mortis causa for the application of article 33.3.b) of the IRPF Law. This implies that, if the beneficiary transfers the asset before five years have passed since the pact or since the death of the deceased, a subrogation into the position of the parents (the improvers) occurs.

This subrogation entails two fundamental consequences for the tax calculation:

• Acquisition value: The value held by the parents will be used, including all their investments, improvements, and expenses made. The beneficiary may add their own expenses inherent to the pact.
• Acquisition date: The original acquisition date of the parents will be maintained, allowing for the preservation of rights to the reductions under the ninth transitional provision of the LIRPF.

What this means for you

If you have received a home or any other asset through an improvement pact and decide to sell it within a period of less than five years, you will not start from an acquisition value based on the moment the asset was received, but rather from the historical value held by your parents. This prevents the capital gain from being artificially increased by the difference between the market value at the time of the pact and the parents' original acquisition value.

Furthermore, the fact of subrogating the original acquisition date is a determining factor for accessing potential tax benefits for the primary residence, provided that the legal requirements are met.

What should be done

In the event of a possible sale of an asset received through an improvement pact, it is necessary to perform a detailed analysis of the parents' documentation. All investments, improvements, and expenses they made on the property must be identified and quantified, as these elements will be part of the acquisition value for the calculation of capital gains or losses.