Business succession planning in Madrid: how to prepare the family business handover
Since 1 July 2026, Madrid has offered its own 99% reduction in Inheritance and Gift Tax for certain transfers of businesses and shareholdings. Law 3/2026 broadens the opportunities available, but it does not remove the need to plan who will take over management, how economic rights will be distributed and what the tax cost of the transaction will be.
A will or a gift can organise ownership, but it must fit the reality of the business and the family’s circumstances.
A lifetime gift may qualify for the Madrid reduction and still trigger a capital gain for the donor under personal income tax (IRPF). Before transferring ownership, it is therefore advisable to consider the taxes, corporate structure and civil-law succession together.
Family businesses: one transfer, different tax requirements
“Family business” does not refer to a single tax regime. Three separate issues must be distinguished:
- The exemption for shareholdings under Wealth Tax.
- The reduction available when those shareholdings are acquired under Inheritance and Gift Tax.
- The donor’s capital gain treatment under personal income tax (IRPF).
The requirements are related, but they do not necessarily match. Reviewing them separately helps identify cases where a benefit under one tax does not carry over to another.
The Wealth Tax exemption
For shareholdings in companies, Article 4.Eight.Two of the Wealth Tax Act requires, among other conditions:
- Minimum shareholding: 5% individually or 20% jointly with a spouse, ascendants, descendants or second-degree relatives by blood, marriage or adoption.
- Paid management duties: the effective exercise of management duties and remuneration exceeding 50% of the income from business, professional and employment activities, under the statutory calculation rules. For a joint shareholding, one member of the family group may meet this requirement.
- Economic activity: the company must not be primarily engaged in managing movable or immovable assets.
Access to the exemption must be distinguished from its scope. Access is lost altogether if, for more than 90 days in the tax year, more than half of the company’s assets consist of securities or assets not used in the business, subject to the statutory calculation exceptions. Once this test is passed, the exemption applies in proportion to the net value of the assets required for the business, after deducting the related debts.
Cash or investments do not automatically disqualify a company from the relief: specific rules apply to securities and undistributed business profits. The origin, use and balance-sheet composition must be reviewed.
What changes with Madrid’s 99% reduction
The regional reduction has its own requirements. Its main features include:
- Beneficiaries include Groups I, II and III, fourth-degree relatives, and even Group IV acquirers who work in the business, with at least ten years’ service and four consecutive years in management roles.
- A broader family group for calculating the joint shareholding threshold.
- Greater flexibility in the period used to demonstrate paid management duties.
- The inclusion of certain cash and investments backed by undistributed business profits from the current year and the previous ten years.
- A five-year retention period, together with the other continuity and value-preservation requirements.
The expanded treatment of cash and investments applies only to Inheritance and Gift Tax. It does not change the proportion used for the Wealth Tax exemption or the TEAC’s view on the donor’s capital gain for personal income tax.
For gifts, this regional relief does not repeat the national requirements concerning the donor’s age or cessation of management duties. The option for the regional reduction must be exercised within the filing period and is incompatible with the comparable national reduction.
Is it better to gift a business or pass it on by inheritance?
The answer depends on the succession plan and the combined tax cost. Personal income tax can make a significant difference.
| Aspect | Inheritance | Lifetime gift |
|---|---|---|
| Donor’s personal income tax (IRPF) | No capital gain arises on death. | A gain may arise unless the special regime applies. |
| Heir’s acquisition value | The value determined under the Inheritance and Gift Tax rules, capped at fair market value. | Under the special regime, the recipient retains the donor’s acquisition cost and acquisition date. |
| Accrued capital gain | No personal income tax is due on the deceased’s accrued gain. | Under the special regime, tax is deferred until a future disposal. |
| Organising the business handover | Continuity after death must be planned. | Allows the next generation to enter the business in advance. |
The donor’s acquisition value is carried over only in gifts covered by Article 33(3)(c) of the Personal Income Tax Act; this rule does not apply to every gift.
National requirements remain decisive for personal income tax
That provision refers to Article 20(6) of the Inheritance and Gift Tax Act. Among other conditions, the gift must be made to the donor’s spouse, descendants or adopted children; the donor must be at least 65 or meet the statutory incapacity condition; and, if the donor performed management duties, they must cease those duties and stop receiving the related remuneration.
The recipient must also retain the gifted assets and qualify for the Wealth Tax exemption for ten years, unless they die, and comply with statutory restrictions on transactions that substantially reduce the value.
Non-business assets may lead to partial taxation
The TEAC considers that personal income tax deferral applies only to the part of the gain corresponding to assets used in the economic activity.
This makes it essential to review the balance sheet before making a gift. Unnecessary investments or cash may lead to partial taxation, even if the transfer receives favourable treatment under Inheritance and Gift Tax.
Residence also matters
In ordinary cases involving Spanish residents, the applicable regional rules depend on the deceased’s residence for inheritances and the recipient’s residence for gifts of shareholdings.
For these purposes, residence is attributed to the autonomous community where the person spent the greatest number of days during the five years before the tax became due. The address on the transfer date alone is not enough. Cases involving non-residents require a specific analysis.
Review the corporate structure before transferring ownership
Planning should begin with a snapshot of the group: companies, shareholders, activities, property, investments, debts and financing needs.
From there, the group can assess whether to retain or reorganise its current structure. A holding company may make group governance easier; separating activities may help allocate responsibilities or prepare for new shareholders. Each option, however, has costs and conditions that must be assessed.
Setting up a holding company or separating assets does not in itself guarantee a succession tax benefit. Before carrying out a reorganisation, its tax effects must be checked and its business reasons documented. Applying the tax-neutrality regime requires attention, among other matters, to the anti-abuse rule in Article 89(2) of the Corporate Income Tax Act.
The will and the articles of association must work together
In a Spanish limited company, inheriting shares gives the heir or legatee shareholder status. However, the articles of association may grant surviving shareholders and, failing them, the company a right to acquire the shares under the terms of Article 110 of the Companies Act.
The intended outcome in the will should therefore be checked against the articles of association. It is also advisable to review voting thresholds, the management body, dividend policy and mechanisms for resolving deadlocks.
A family protocol can organise the involvement of relatives, management responsibilities and exits from the share capital. Its effect depends on its terms and structure: contractual commitments and provisions in the articles of association serve different purposes.
Practical example: three children, one running the business
A business owner has three children. One manages the company, while the other two have careers outside it. The company has also accumulated property and investments.
Dividing the shares equally may be a valid option, but the family should consider how the business will be governed and how everyone’s financial expectations will be met.
A succession plan could combine these measures:
- Review the balance sheet and tax reliefs, distinguishing how each asset is treated for Wealth Tax, Inheritance and Gift Tax, and personal income tax.
- Define future ownership and governance, considering who will control the company and how the other shareholders will be protected.
- Consider compensation through other assets or cash. Subject to its conditions, Article 1056(2) of the Civil Code allows a business or control of a company to be preserved by paying the other beneficiaries’ reserved shares in cash, including with funds from outside the estate.
- Compare inheritance and a lifetime gift, estimating the tax cost and subsequent obligations.
- Coordinate the will, articles of association and family agreements, including a solution for the owner’s incapacity or absence.
The plan should keep the business operating while respecting each heir’s rights.
What to check before the handover
Before formalising a transfer, it is advisable to review:
- Share ownership and the composition of the family group.
- Who actually manages the business and how they are paid.
- The source of cash and investments and whether they are needed by the business.
- The parties’ residence and personal circumstances.
- The combined tax cost and ongoing retention commitments.
- The liquidity needed for taxes and compensation payments.
- Consistency between the will, articles of association and family agreements.
- Continuity of management in the event of death or incapacity.
The plan should also be updated when the family, management, group assets or sale plans change. Preparing early gives everyone more time to make informed decisions and understand the consequences of the handover.
Business succession planning with Godia Asesores Tributarios
At Godia Asesores Tributarios, we help business owners and families review their asset structure, check tax requirements and plan business transfers in coordination with civil and corporate law.
If you are preparing a generational handover, explore our business succession planning service.
Article updated on 28 October 2026. This is general information only. Every transaction requires individual analysis.