DGT conditions the reinvestment reduction in Inheritance Tax

The Directorate General of Taxes (DGT) has issued a relevant criterion for heirs intending to apply reductions in Inheritance and Gift Tax (ISD) through the reinvestment of funds. The central issue lies in determining whether the divestment of a minimum amount, intended exclusively to cover down payments on a property, satisfies the value maintenance requirement provided for in current regulations.

What the DGT has resolved

The query focused on whether an operation complies with the maintenance requirement established in Article 20.2c) of the Inheritance and Gift Tax Law (LISD) when only the amount necessary to meet each down payment on a property is divested. The DGT has determined that the destination of the funds toward down payments on a property prevents the accreditation of the immediate materialization of the maintenance of the estate's value.

What this means for you

This criterion has a direct impact on heirs who have applied reductions for family business concepts or other assets and who subsequently wish to reinvest said capital in other assets or in the acquisition of housing. For the reduction to be valid, the law requires that the value of the estate be maintained. The Administration's interpretation indicates that if the divestment is partial and is used to cover periodic obligations such as down payments, it cannot be demonstrated that the value is being maintained fully and effectively according to the parameters of the LISD.

What should be done

In this situation, it is fundamental to analyze the structure of the reinvestment and the way funds are managed following the transfer of assets. Since the Administration requires clear accreditation of value maintenance, any diversion of funds toward periodic payments could jeopardize the application of tax reductions. It is recommended to assess each case individually to ensure that the reinvestment strategy strictly adheres to what the regulations and the DGT jurisprudence require.