TAX LAW DIVISION
The Family Business Support Act entered into force on 1 July, following its publication in the Official Gazette of the Community of Madrid on 30 June 2026. The legislation has a clear objective: to facilitate generational succession in family businesses by removing the tax obstacles that, until now, could hinder their transfer. To this end, it introduces a series of specific reliefs under Inheritance and Gift Tax that substantially improve the previous regime.
The first notable development is the increase in the percentage reduction applicable to the value of a family business, from 95% to 99%, both in the case of inheritances and lifetime gifts. Although the increase may appear modest, its practical impact is significant, as the value effectively subject to taxation is reduced to one-fifth of that under the previous regime.
In addition to this quantitative improvement, the Act considerably expands the range of family members who may benefit from the reduction. Until now, the relief was essentially limited to spouses, descendants and adopted children, while collateral relatives — siblings, uncles and aunts, and nephews and nieces — could benefit only in the case of inheritances and only where there were no descendants.
Under the new rules, the reduction is extended to collateral relatives up to the fourth degree of kinship — including cousins, great-uncles and great-aunts, and great-nephews and great-nieces — whether related by blood or affinity, such as brothers- and sisters-in-law, parents-in-law and other relatives by marriage. The relief may apply even where the deceased has descendants. The Act also extends eligibility to individuals outside the family who can demonstrate at least ten years’ service with the company and four years performing management functions.
This expansion of the range of eligible persons is reflected consistently in the other requirements for the reduction. Thus, the 20% combined shareholding threshold, which until now could be calculated only by reference to the spouse, ascendants, descendants and second-degree collateral relatives, is extended to include relatives up to the fourth degree. This will be particularly useful in companies whose share capital is dispersed among several branches of the family.
Similarly, the group of relatives capable of satisfying the requirement concerning the performance of remunerated management functions is also extended to the fourth degree. In this respect, the Act also resolves two issues that had generated legal uncertainty: it clarifies that the person performing the management role does not need to hold an ownership interest in the company, and that the requirement for the remuneration received to constitute the individual’s principal source of income may be satisfied either in the year of death or gift or in the preceding calendar year. This removes the uncertainty that arose when the taxable event occurred during the first months of the financial year.
Another particularly important development for those wishing to plan succession during their lifetime is the removal of restrictions previously imposed on the donor. It is no longer necessary for the donor to be 65 years of age or older, nor are they required to cease performing management functions. This makes it possible to plan the transfer gradually and flexibly, without making the gift conditional upon a transfer of management responsibilities.
It should be borne in mind, however, that these requirements continue to apply for the purposes of Spanish Personal Income Tax (IRPF) at the national level. If they are not met, the donor may therefore be liable to tax on the capital gain arising from the gift.
Perhaps the development with the greatest practical significance is the extension of the rule concerning subsequently acquired non-business assets to the calculation of the applicable reduction percentage. Until now, financial assets accumulated on a company’s balance sheet — such as cash reserves, investment funds, bank deposits and listed shares — could be regarded as assets not used in the business activity. This could reduce the percentage reduction available and generate significant litigation.
Under the new Act, these assets will be regarded as business assets, provided that their value does not exceed the profits accumulated by the company over the previous ten financial years. This provides considerably greater legal certainty and significantly reduces the risk of disputes with the tax authorities.
In short, the measures adopted strengthen Madrid’s position as a region with a tax regime favourable to generational succession. However, the possible introduction at national level of a Tax on Large Inheritances and Gifts could offset these benefits, as occurred with the Temporary Solidarity Tax on Large Fortunes.
In light of this scenario, it is advisable to review the circumstances of each family business individually in order to assess the available options and ensure an orderly succession while the current legislative framework remains in force.
