Managing an inheritance not only involves receiving assets but also facing tax obligations. Understanding which charges, expenses and debts are deductible under the Inheritance and Gift Tax (ISD) regulations allows minimizing the tax impact.
When an inheritance is received, not only are assets and rights acquired, but also tax obligations arise that can significantly affect the heir’s tax burden. However, the current Inheritance and Gift Tax (ISD) regulations allow deductions to be applied for certain charges, expenses and debts associated with the inheritance, which can reduce the taxable base and, therefore, the amount payable.
In this circular, we have compiled the essential information on what concepts can be deducted, how to justify them and what is the procedure to apply them correctly, thus ensuring optimal tax planning and adjusted to the legality.
1. Deductible charges
Charges and encumbrances are those concepts that affect the value of the inherited assets, reducing their capital. According to Article 12 of the Inheritance and Gift Tax Law 29/1987 (LISD) and its Regulations, only those charges of a perpetual, temporary or redeemable nature that are directly established on the assets and that entail a real decrease in their value are deductible. Examples of deductible charges include:
- Legally established censuses and pensions.
- Usufruct rights, calculated according to their capitalization in accordance with current regulations.
On the other hand, mortgages and pledges are not deductible, since they do not directly affect the value of the transferred property.
Example: Marta inherits a rural property encumbered by an emphyteutic census. Since this encumbrance represents a permanent burden on the property, it can be deducted when calculating the ISD taxable base.
2. Deductible debts
The debts of the deceased can be deducted if they comply with certain formal requirements. In accordance with Article 13 of the LISD, the following can be deduced:
- Debts of the deceased are accredited in a public document or in a private document with an irrefutable date.
- Outstanding tax obligations, including state, autonomous community and local taxes.
- Debts with the Social Security, if they are assumed by the heirs after the death.
Those debts contracted with the heirs, spouses, ascendants, descendants or siblings of the deceased will not be deductible, unless there is proof of their patrimonial independence.
Example: Tomás inherits a family business and discovers that his father left the payment of the Economic Activities Tax (IAE) pending. As it is a tax debt verifiable by means of a public document, Tomás will be able to deduct it in the ISD.
3. Deductible expenses
The regulations allow certain expenses derived from the management of the inheritance to be deducted. According to article 14 of the LISD they are deductible:
- Last illness expenses, if they are paid by the heirs and their direct relationship with the cause of death can be demonstrated.
- Burial and funeral expenses, to the extent that they are proportional to the estate and are duly justified.
- Procedural costs and arbitration, if the probate or declaration of heirs acquires a litigious nature and for the common benefit of the heirs.
Expenses related to the administration of the estate, or the costs of nursing homes will not be deductible, unless strictly medical expenses can be itemized.
Example: A brother assumes the expenses of his father’s funeral, including the coffin and the religious ceremony. By presenting the corresponding invoices, he can deduct these expenses in the ISD liquidation.
4. Procedure for the deduction of charges, debts and expenses
For the deductions to be valid, the heirs must provide reliable documentation, such as:
- Public deeds or notarized contracts.
- Proof of payment (invoices, receipts, bank transfers).
- Certificates of debts issued by public bodies.
- Judicial or administrative testimonies.
If a debt was not known at the time of liquidation of the ISD, it is possible to request the rectification of the liquidation and the refund of the excess paid, as stipulated in article 94 of the ISD Regulation.
5. Distribution of debts among heirs
The distribution of debts and charges among the heirs will be made in proportion to the inheritance quota of each one, unless the testator has provided otherwise in his will.
The correct application of the deductions in an inheritance can generate a significant impact on the tax burden of the heirs. It is essential to know the regulations and compile the necessary documentation to justify any deduction.
For more information, please consult with Tax consulting
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