Limits on the habitual residence reduction for collateral relatives in inheritances

The application of the habitual residence reduction in Inheritance and Gift Tax (ISD) is one of the points of greatest interest for heirs. Recently, the Dirección General de Tributos (DGT) has clarified the limits of this tax benefit in the case of collateral relatives, such as nephews and nieces.

What the DGT has ruled

The inquiry focused on the possibility of applying the reduction provided for in Article 20.2.c) of the Inheritance and Gift Tax Law (LISD) to a nephew. The taxpayer intended to access this benefit based on the status of a collateral relative over sixty-five years of age.

However, the DGT has determined that for a relative with this degree of kinship to benefit from the reduction, two concurrent conditions must be met: being over sixty-five years of age and effective cohabitation with the deceased in the residence during the two years immediately preceding the death.

In the case analyzed, as the prior cohabitation required by the regulations was not proven, the nephew cannot access the reduction. The administration has emphasized that the application of this benefit by analogy is prohibited by the General Tax Law (LGT).

What this means for you

This criterion reinforces the rigidity of the regulations regarding successions. If you are a collateral heir, meeting the age requirement is not enough to apply the habitual residence reduction. Real and continuous cohabitation during the two-year period prior to death is a determining and mandatory element.

For non-residents, it is important to remember that they are taxed by real obligation on assets located in Spanish territory, so these rules regarding cohabitation and age are applied with the same technical rigor.

What should be done

In a succession situation, it is fundamental to verify whether all the objective requirements demanded by the LISD are met. The lack of a single element, such as proven cohabitation, nullifies the possibility of applying the reduction. It is recommended to assess the particular situation of each inheritance and the documentation that proves the domicile of the deceased and the heirs to avoid contingencies with the Tax Administration.