A researcher at the Bank of Spain, Isabel Micó-Millán, has discovered that the wealthiest 0.5% of people in Catalonia make capital contributions to “family businesses” before their death so that their heirs pay less taxes. It is “a strategy to minimize the tax burden” – according to Micó-Millán – with which the richest [con herencias imponibles superiores a 2 millones de euros] They manage to avoid in total about a third of the inheritance and donation tax. About 120 million each fiscal year since 2014.
This tax is one of those transferred by the central State to the Autonomous Communities of the common regime (all except Euskadi and Navarra, which have regional regimes), along with assets or 50% of personal income tax (personal income tax). , among other less important ones.
The researcher has chosen the example of Catalonia to analyze the tax on inheritances and donations because, in 2014, the Government of the Generalitat carried out “an important reform” that eliminated part of the exemptions that had been established a few years before, mainly for the richest, and that are maintained or have recently been introduced in other Communities, such as Madrid or Andalusia.
“After the reform, descendants inherit substantially more wealth through tax-favored assets,” says Micó-Millán in his research, published this Tuesday. “This effect is explained by the reaction of the descendants in the top 0.5% of the distribution [de la riqueza]whose inheritance composition is experiencing a strong shift towards participations in family businesses,” observes this expert.
“This change in the composition of inheritances is consistent with transfers of assets, by ascendants, to family businesses as capital contributions before their death,” he continues. “My estimates suggest that, due to the reclassification of private assets into business assets via family businesses, Catalonia stops receiving income equivalent to 27% annually. [120 millones cada año] of the collection of this tax [el de sucesiones y donaciones]”, he says.
These same calculations suggest that the richest avoid 300,000 euros on average. Transfers of personal assets to family companies by entrepreneurs can take different operational forms. First, entrepreneurs can add assets to their companies as paid-up capital. In this case, companies issue new shares that shareholders receive in exchange for their capital contributions. Secondly, they can also add real assets, such as buildings or vehicles, as operating capital as long as the use of these assets can be linked to the economic activities of the company. Third, entrepreneurs can always sell any assets to their companies.
According to Micó-Millán, transfers in the form of capital are the most common, because they are exempt “from capital gains tax and, unlike what happens with real assets related to business activity, it is not necessary to justify or link the use of these assets for the company’s business activity.”
The collection is close to 1,000 million in Catalonia and is barely 500 million in Madrid
The inheritance and gift tax collected just under 300 million in 2013, its lowest since 2002, and since 2014 it has grown: from 312 million that year to 951 million in 2023 [impulsado por otra reforma en 2020]. 833 million in inheritances alone, without adding the tax on donations. According to Micó-Millá research, this last figure should exceed approximately 1,000 million if the richest did not avoid part of what they have to pay by taking advantage of the advantages of family businesses.
Without taking into account these means of avoidance, in the 2023 Budgets, the Generalitat calculated tax benefits of 1,500 million. That is, for every euro paid in inheritance tax, two euros are lost in Catalonia. The tax benefits in the Community of Madrid in this same tax are close to 4,000 million, while it collects close to 500, raising the ratio to eight times. In Andalusia, the regional Budgets indicated that for every euro entered there would be a bonus of four euros in 2023.
Again in Catalonia, “the strong and opportune [desde la reforma de 2014] change in the composition of wealth transfers towards assets of family businesses suggests that these can easily be used as vehicles for tax evasion with non-negligible tax consequences,” continues the Bank of Spain expert.
“The preferential treatment of business assets to support the succession of family businesses is recurrent in most countries that apply an inheritance tax. The usual argument is that heavily taxing business succession can put the liquidity of companies at risk and, therefore, negatively affect employment and growth,” he says.
In his opinion, “although inheritance taxation can affect the liquidity of companies at the time of succession, it cannot be overlooked that the introduction of preferential taxation of family businesses encourages the rich to invest in they. […] To use them as vehicles to avoid inheritance tax,” the researcher insists.
“The results of this work [la investigación publicada por el Banco de España] They shed light on the acuity and speed with which wealthy individuals do it. This can not only generate adverse consequences for tax revenues, but can harm the progressivity of a tax that is usually considered a tool to promote social mobility,” he concludes.
Only one in four Catalans who inherit pays the inheritance tax
Official figures from the Department of Economy of the Generalitat show that of the 136,000 Catalans who had to pay inheritance dues for having received an inheritance in 2022, 74% of them paid less than one euro. Of the 36,000 Catalans who paid something for having received an inheritance, some 27,200 paid an amount that amounted to less than 10,000 euros in total, of which half were even valued at less than 1,000 euros.
Finally, the group of Catalans who in 2022 had to pay more than 10,000 euros for inheritance were only 8,148 declarants, which represents 6% of those affected by inheritance, and all of them after having been beneficiaries of large bequeathed assets, of at least least 400,000 euros without counting the habitual residence. “The 2014 reform meant a progressive increase […] for descendants with taxable inheritances greater than 750,000 [el 2% de los herederos más ricos]”, collects Micó-Millán.
Inheritance is a very complex tax in its application, as it tries to adapt to very different cases. To calculate it, three factors must be taken into account: the amount that is inherited, the degree of relationship with the deceased and the assets that the heir already has at the time of death.
To this we must add that personal situations that generate deductions are also contemplated, such as the age of the recipient, a possible disability or dependents, or the aforementioned obtaining of the habitual residence, typical of inheritances from spouses. In short, the more you inherit, the more money you have and the further away you are from the deceased, the more you will pay.
However, deductions make the vast majority of citizens avoid this tax. Catalunya is one of the communities that has the highest average rate, but also one that has more deductions and exemptions in broader ranges. In general, up to 100,000 euros nothing is paid and for the habitual residence there are deductions of up to 95% if this does not exceed “500,000 euros per home and 25,000 euros per heir.”
“Companies offer individuals the opportunity to transfer assets with lower economic transaction costs. For example, moving financial wealth into a primary home involves, at a minimum, purchasing a new property and paying transaction taxes. On the other hand, the transfer of wealth to a company as a capital contribution is exempt from paying capital gains tax. Secondly, wealthy individuals have disproportionate access to this specific vehicle for tax evasion, since corporate wealth is extremely concentrated at the top,” concludes the Bank of Spain researcher.
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