Inheriting in life: foral succession pacts (Galician apartación and mejora and others)

A succession pact is a contract between the future deceased and one or more beneficiaries to organise the succession now, during their lifetime. In pacts with present delivery, the beneficiary acquires ownership of the asset at the moment of signing, without waiting for the death.

The common Civil Code generally prohibits them, but they are allowed by foral or special civil laws: Galicia, the Basque Country, Navarre, Aragon, Catalonia and the Balearic Islands. Therefore, they can only be used by someone subject to one of those laws, usually through their civil neighbourhood.

Their appeal is tax-related: article 3.1.a) of Ley 29/1987 on Inheritance and Gift Tax subjects acquisitions by inheritance, legacy or any other succession title to taxation, and article 11.b) of its Regulation expressly includes succession contracts or pacts among those succession titles. Article 24.1 of the same law adds the special accrual rule: in succession pacts with present effect, the tax accrues on the day the pact is signed. They are therefore taxed as an inheritance (mortis causa) and not as a gift, applying the inheritance tax reductions of the competent region.

Furthermore, according to the criteria confirmed by the Supreme Court in 2016 and repeatedly assumed by the Directorate General for Taxation (among others, rulings V1543-15, V0430-17 and V1233-20), the person transferring via apartación or mejora with present delivery does not obtain a capital gain in their personal income tax, unlike what happens in a gift.

Ley 2/2006, of 14 June, on Galician civil law regulates two succession pacts (article 209): the pacto de mejora and the apartación. They can only be executed by adults with full legal capacity (article 210) and must be recorded in a public deed: without it, the pact has no effect whatsoever (article 211).

The pacto de mejora (articles 214 to 218) is agreed in favour of descendants regarding specific assets. It can be done with present delivery, in which case the beneficiary acquires ownership immediately, or without present delivery, where the acquisition is deferred. It is common to transfer only the bare ownership and for the transferor to reserve the usufruct.

The apartación (articles 224 to 227) is more radical: the person who would have the status of forced heir if the succession were opened at that moment receives specific assets and, in exchange, is irrevocably excluded, for themselves and their lineage, from the status of forced heir in the transferor's inheritance. The transferor can allocate any asset or right, regardless of its value.

In practice, the mejora serves to advance assets to children and grandchildren while maintaining their inheritance rights, and the apartación to deliver a part of the estate to a forced heir now, definitively closing their participation in the future inheritance.

Each territory with its own civil law has its own figures, with different subjective requirements and limits. In the Basque Country, Ley 5/2015 on Basque Civil Law allows succession pacts with present effect or after death. In Navarre, the Fuero Nuevo regulates succession pacts or contracts. In Aragon, the Aragonese Foral Law Code contemplates agreed succession, including the institution with present transmission of assets.

In Catalonia, the fourth book of the Catalan Civil Code regulates inheritances and succession pacts of particular attribution, which can include the present transmission of specific assets; they can only be executed with a spouse or partner and with certain relatives. In the Balearic Islands, the Compilation includes the Majorcan universal gift, the definition (the descendant renounces the forced share in exchange for a lifetime attribution) and the pacts of Ibiza and Formentera.

Taxation as a mortis causa succession is common to all of them when there is a present transmission, but the tax reductions and rates depend on the competent regional or foral tax authority: there is no single figure for the whole of Spain. Managora studies which figure fits your case and calculates the cost using the regulations of your territory.

Inheritance Tax: the beneficiary is taxed as in an inheritance, accruing on the day of the deed (article 24.1 of Ley 29/1987). In Galicia, the kinship reduction of €1,000,000 applies for groups I and II and a rate of 5% to 18%, so many pacts between parents and children with values below one million euros do not generate a tax quota. It is self-assessed using form 650 within 1 month from the day following the deed.

Personal income tax of the transferor: in the apartación and in the mejora with present delivery, no capital gain is generated for the transferor, according to the consolidated criteria of the Supreme Court and the Directorate General for Taxation.

Personal income tax of the beneficiary, the 5-year rule: Ley 11/2021, of 9 July, modified article 36 of Ley 35/2006 on personal income tax. If the beneficiary transfers the asset before 5 years have passed since the pact was signed, or before the death of the transferor if earlier, they subrogate to the original acquisition value and date of the transferor when that value is lower than the one declared in the Inheritance Tax. That is, they would pay personal income tax on the gain accumulated over the entire life of the asset. The rule applies to sales made since 11 July 2021.

Accumulation: for accruals after 11 July 2021, succession pacts between the same people are accumulated with each other when less than 3 years have passed, and with the final inheritance when less than 4 years have passed; the kinship reduction is unique for the whole, according to the official instructions for form 650 from the Atriga.

If an urban property is transferred with present delivery, the plusvalía municipal (local tax on the increase in value of urban land) also accrues. As it is a transmission that occurs during the transferor's lifetime, the criterion of the Directorate General for Taxation is to apply the deadline for inter vivos acts from article 110 of the consolidated text of the Local Tax Agencies Regulatory Law: 30 working days from the deed, and not the 6 months for mortis causa transmissions.

The succession of a Spaniard is governed by the law of their civil neighbourhood (articles 9.8 and 14 of the Civil Code). To execute a Galician apartación or mejora, the transferor must have Galician civil neighbourhood; the same applies to each foral figure regarding its territory.

Civil neighbourhood does not coincide with the padrón (the municipal registry of inhabitants) nor with tax residence: it is acquired by continuous residence of 2 years with an express declaration before the Registro Civil (the Spanish civil registry), or of 10 years without a declaration to the contrary. Moving to Galicia does not entitle you to sign an apartación the next day, and this is one of the errors that causes the most parallel tax assessments.

Foreigners residing in Spain are governed by Regulation (EU) 650/2012: as a general rule, their succession is subject to the law of their habitual residence, which can lead to applying the foral law of the territory where they live and open the door to these pacts. It is a case-by-case analysis that Managora carries out before drafting anything.

Be careful also with the competent tax authority: in succession pacts, the tax is governed by the regulations of the region where the transferor has their habitual residence for tax purposes, so civil neighbourhood and tax residence must be examined separately.

The main risk is the loss of control: in pacts with present delivery, the asset definitively leaves the transferor's estate. This can be modulated by reserving the usufruct and transferring only the bare ownership, but the decision is essentially irreversible: succession pacts are generally irrevocable and only lapse in the specific cases provided for by each foral law or by a new agreement of the parties in a public deed.

In the apartación, the excluded person and their lineage are irrevocably excluded from the forced share, even if the transferor's estate grows later. And a poorly designed pact can harm the forced shares of other heirs and end up being challenged. That is why the prior legal design matters as much as the taxation.

The tax advantage can also evaporate: if the beneficiary's plan is to resell soon, the 5-year rule of article 36 of the personal income tax law will make them pay tax on the historical gain of the asset. The pact is worthwhile when the beneficiary is going to keep the asset or when the transmission seeks to organise family succession (housing, company, rural properties).

Compared to making a will, the pact anticipates the transmission and gives security to the beneficiary today, with the same inheritance taxation; compared to gifting, it avoids the transferor's personal income tax and takes advantage of inheritance reductions. Managora checks your civil neighbourhood, gives you the tax calculation in writing before you pay anything and prepares the draft pact with legal certainty against anti-fraud regulations, so that you only have to go to the notario (the Spanish notary) to execute the deed. You can see the updated price of the service on the procedure's page and order it entirely online.