The Community of Madrid expands the Inheritance Tax reduction for family businesses

With the new regulation, the applicable reduction for inheritance or donation of family businesses increases to 99%, and the beneficiaries of the reduction are expanded. The Law Supporting Family Businesses entered into force on July 1. As expert inheritance lawyers, we tell you all the details in this article. 

What reductions and allowances apply in the Community of Madrid?

When an inheritance is received, two taxes must be paid: inheritance tax and the municipal capital gains tax if real estate is involved. Paying these taxes can be a significant burden for heirs, who, at times, may consider the option of waiving the inheritance for this reason. 

However, before waiving, it is necessary to check whether any of the allowances and reductions regulated in the Community of Madrid regarding inheritance tax can be applied, which are the following: 

Tax Allowances

• 99% allowance on the tax liability for Group I relatives (children, grandchildren, and adoptees under 21 years old) and Group II relatives (children, grandchildren, and adoptees aged 21 or older, spouse, ascendants, and adopters). 
• With the reform, 2nd and 3rd-degree collateral relatives, as well as ascendants and descendants by affinity (siblings, uncles/aunts, etc.), apply a 50% allowance (previously it was 25%). 

Reductions

• By kinship with the deceased. For example, 21-year-old children can apply a reduction of 16,000 euros plus 4,000 euros for each year under 21. The maximum reduction is 48,000 euros. 
• For disability. For example, with a 33% degree of disability, the reduction is 55,000 euros. 
• For life insurance. A 100% reduction applies with a limit of 9,200 euros on the amounts received by the insurance beneficiary. 
• For primary residence. If a child or spouse inherits the primary residence, a 95% reduction will apply, but they must keep it in their estate for the following 5 years after the death. 
• For Historical Heritage assets. A 99% reduction applies with the requirement that they must remain in the estate for 5 years from the death of the deceased. 
• For toxic syndrome compensation. Compensation paid by Public Administrations to the heirs of those affected by toxic syndrome will have a 99% reduction on the amounts received, regardless of the tax accrual date. The reduction does not apply when the compensation received is subject to personal income tax. 
• For acts of terrorism. When the tax base includes compensation paid by Public Administrations to the heirs of those deceased due to acts of terrorism, a 99% reduction will apply to the amounts received, regardless of the tax accrual date. In this case, the reduction does not apply either when the compensation is subject to personal income tax. 

The novelty in Inheritance Tax for 2026 in Madrid for family businesses

In relation to this reduction, the novelties are the following: 

• The reduction of the tax base will be 99% (previously it was 95%). 
• The application of the reduction is extended to acquirers in Group III (i.e., second and third-degree collateral relatives and ascendants and descendants by affinity), fourth-degree collateral relatives by consanguinity or affinity of the deceased; and Group IV other than fourth-degree collateral relatives by consanguinity or affinity (i.e., more distant relatives), if they have an employment or service provision contract in the company, prove a minimum seniority of ten years, and exercise management functions in the company with a seniority of four years. 
• Regarding the period for maintaining the business, it has not been modified and remains five years. 

When is inheritance tax paid? 

Inheritance tax must be paid when assets derived from an inheritance are received. The period to pay is six months from the death, and an extension of another six months can be requested, provided it is asked for during the first five months of the period. 

The tax settlement must be carried out electronically through the electronic headquarters of the Community of Madrid or in person at a liquidation office. 

To settle the tax, the following must be submitted: 

• Form 650. 
• The death certificate and the certificate of last wills. 
• A copy of the will. 
• The deed of acceptance of inheritance. 
• Proof of the value of the assets. 

It is important to know that, even if the amount to be paid is minimal or zero, submitting the self-assessment is mandatory. 

What happens if I do not pay inheritance tax? 

In the event that you do not settle the tax within the established period, you will have to face several consequences: 

• Payment of late payment interest. These correspond to the period of time that elapses between the end of the payment term and the date on which the payment is made. The calculation base for the interest is formed by the amount that was not paid.
• Payment of a penalty. If you do not pay the tax on time, you commit a tax offense that can be punished with a penalty ranging from 50% to 150% of the unpaid amount. This penalty could be reduced by the administration if:
  • You agree with the regularization made by the tax administration. 
  • You do not appeal the regularization or the penalty.
  • You make the payment of the penalty within the voluntary payment period.

However, you can avoid all these consequences if you self-assess the tax before the tax administration notifies you of the regularization procedure. In this case, you will have to pay surcharges, which will be the following: 

• A 5% surcharge on the tax amount if the delay does not exceed 3 months. 
• A 10% surcharge on the tax amount if the delay does not exceed 6 months. 
• A 15% surcharge on the tax amount if the delay does not exceed 12 months.
• A 20% surcharge on the tax amount if the delay exceeds 12 months. In this case, additionally, you must pay late payment interest. 

In the most extreme scenario, if the unpaid tax amount exceeds 120,000 euros, it could be considered a tax fraud offense. 

If you want to avoid all these consequences and receive advice from expert succession law lawyers, contact our team so we can analyze your case.