The Supreme Court reduces inheritance tax in cases of substitution

Paying taxes is one of the most significant burdens when receiving an inheritance, but what happens if a person renounces the inheritance and it falls to a substitute? How much inheritance tax must be paid? Can any allowances be applied? These questions have been answered in a recent Supreme Court ruling. We will tell you all the details in this article.

The case under analysis: replacement of an heir by their child

To understand the ruling, we must first examine the facts analysed by the Supreme Court, which are as follows:

A woman from Asturias died in 2016 and had made a will providing for the substitution of heirs, so that if one of her five children did not accept the inheritance, it would pass to their descendants (the deceased's grandchildren). This is what is known as vulgar substitution, regulated by Article 774 of the Civil Code, which establishes the following:

The testator may substitute one or more persons for the heir or heirs appointed in the event that they die before him or her, or do not wish to or cannot accept the inheritance.

Simple substitution, without specification of cases, includes the three cases mentioned in the previous paragraph, unless the testator has provided otherwise.

One of the children renounced their share of the inheritance and the grandchildren of the deceased (children of this heir) took their place.

The problem arose when the Principality of Asturias Tax Agency considered that Article 28.1 of the Inheritance and Gift Tax Law should be applied to the payment of inheritance tax, meaning that, for the purposes of paying the tax, the relationship of the son to the deceased should be taken into account and not that of the substitute (the grandson). This meant that the amount to be paid increased considerably.

The grandson had applied the Group I reduction (i.e. descendants under 21 years of age), but the Tax Authority considered that Group II should be applied (as if the father were the heir), which considerably increased the tax burden.

The dispute reached the Supreme Court.

What does the Supreme Court ruling say about inheritance tax in these cases?

The Supreme Court has analysed the case to decide which reduction applies in terms of inheritance tax based on kinship: that corresponding to the deceased's child, or that corresponding to the grandchild, with respect to the testator.

In this case, the nuance is as follows: the replacement of one heir by another was already provided for in the will and the heir renounced his inheritance, so the relationship to be considered for inheritance tax purposes is that of the deceased's grandchild.

Therefore, the Supreme Court annulled the assessment made by the Principality of Asturias Tax Agency and confirmed the assessment of the grandchild.

What happens if the will does not provide for substitution?

In this case, the Supreme Court considers that if the will does not regulate substitution, or regulates it only in the event that the heir dies before the testator or is incapacitated, the relationship between the person renouncing the inheritance and the deceased is taken as a reference for inheritance tax purposes.

Does a person who renounces their inheritance have to pay tax?

This is a more common question than it seems. The answer is that if a person renounces their inheritance, they do not acquire it at any time, so they do not have to pay inheritance tax. However, it should be remembered that it is possible to renounce the benefit of inventory, for example, so that the debts of the inheritance are paid with the assets of the inheritance and not with the assets of the heir.

Why is it advisable to name substitutes in a will?

Inheritances can generate many conflicts between heirs, so it is important to take all necessary precautions to avoid these conflicts from the moment the will is drawn up.

It is advisable to name substitutes for heirs because:

• Regulating substitution helps to anticipate events that may occur, such as an heir dying before the testator or not wanting or being unable to accept the inheritance.
• It avoids having to modify the will every so often if circumstances change, which means more paperwork and more expenses.
• It helps the testator to ensure that their wishes regarding the inheritance are fulfilled because it regulates all the most common possibilities.
• It prevents the door from being opened to intestate succession.
• And, above all, it prevents conflicts from arising between the heirs over how the inheritance is distributed, the value of the assets or other issues.

What types of vulgar substitution exist?

According to the Civil Code, there are three types:

• Simple vulgar substitution. The testator defines the person who will replace the heir. The substitution will occur in any of the following three cases provided for in the Civil Code:
  o The heir dies before the testator.
  o The heir is not capable of accepting the inheritance.
  o The heir renounces the inheritance.
• Ordinary substitution with expression of cases. In this case, one of the cases mentioned in the will is expressly cited.
• Reciprocal ordinary substitution. If there are two or more heirs with equal shares, the testator may designate them as reciprocal substitutes.

On the other hand, we must remember that it is possible to appoint substitutes as desired: for example, one person to replace two or more heirs, or two or more substitutes for one, two or more heirs.

In short, inheritance planning requires study and knowledge of the regulations so that the testator's objective and wishes are fulfilled and conflicts between heirs are avoided or reduced.

Contact us if you want to plan your inheritance or if you are an heir and are involved in a conflict with other heirs.