Maintaining the Inheritance Tax reduction through reinvestment

Managing tax benefits following a succession requires precise knowledge of reinvestment requirements. Recently, the Dirección General de Tributos (DGT) has clarified the scope of the reduction provided for in the Inheritance and Gift Tax Law (LISD) when the sale of shares or the dissolution of a company occurs.

What the DGT has ruled

The inquiry focused on whether it was possible to meet the requirement of maintaining the tax benefit during the ten-year period by reinvesting the amount obtained in assets other than the original shares. The DGT's criteria establish that, to preserve the reduction under article 20.2.c) of the LISD, it is necessary to carry out the reinvestment and the immediate materialization of the amount obtained in other assets.

The administration clarifies that the legal requirement does not demand the continuity of the previous economic activity, but rather the maintenance of the acquisition value upon which the reduction was applied. This reinvestment can be executed in a wide variety of instruments, such as:

• Real estate.
• Shares.
• Investment funds.
• Deposits.
• Any other financial product.

The key lies in the reinvestment being as immediate as possible to ensure that the value remains intact during the required period.

What this means for you

If you have received shares in a company through an inheritance and subsequently the dissolution of said company or the sale of its shares occurs, the tax benefit obtained is not definitive. To avoid losing the reduction applied at the time of succession, the heir is obliged to reinvest the capital obtained.

This scenario directly affects individuals, who must ensure that the money does not remain unproductive, as the regulations seek to ensure that the patrimonial value that benefited from the reduction is maintained through other assets during the ten-year period.

What should be done

In a situation involving the sale of inherited shares, it is necessary to assess the composition of the new asset portfolio. The choice of new instruments must guarantee the immediate materialization of the reinvestment to prevent the Administration from considering that the link for maintaining the value has been broken. It is recommended to analyze the nature of the new assets to ensure they fulfill the objective of preserving the amount obtained.