The new valuation of household contents for inheritance tax

Household contents in Inheritance Tax

Inheritance Tax is calculated on a tax base made up of all the assets and rights a person acquires on the death of another: the sum of the real value of everything in the estate. However, the household contents (ajuar doméstico) are always added to that sum.

To work out the value of the household contents, we start from Article 15 of the Inheritance and Gift Tax Act, which provides that the household contents form part of the estate and are valued at 3% of the value of the deceased’s estate, unless the interested parties assign them a higher value or reliably prove that they do not exist or are worth less than the percentage.

In other words, the household contents are almost automatically deemed to be 3% of the total estate, unless proven otherwise. But what happens with estates made up mostly of money, securities, property investments or other intangible assets that have nothing to do with household contents?

A new line of case law

Courts have recently begun to hand down judgments that clarify and question this Article 15 criterion. The starting point is the landmark judgment of the Administrative Chamber of the Supreme Court in Cassation Appeal 4521/2017 of 10 March 2020, followed by others applying the same criterion (Supreme Court judgments of 19 May 2020 in Cassation Appeals 5938/2017 and 6027/2017).

According to this new case law, “household contents only comprise a certain class of assets, not a percentage of everything in the estate”. The court also held that proving that they do not exist or are worth less must necessarily be done in relation to specific, identified assets, and obviously not to all the assets in the estate.

The court considered that treating 3% of the estate as household contents may breach the principle of ability to pay (Article 31.1 of the Spanish Constitution) and possibly the principle of equality in taxation. It would place a heavier tax burden on someone who, with the same net wealth, had no household contents of their own, or had fewer than the law presumes — because the tax authorities’ interpretation makes it practically impossible to prove otherwise, forcing the 3% to remain fixed, which in turn affects the tax payable because the tax is progressive.

Which assets make up the household contents under the new case law?

Until then, some judgments held that the 3% was a rebuttable presumption that could be disproved, or that it could be shown that there were no household contents at all. Other judgments ruled the opposite way.

Faced with this contradiction, the Supreme Court decided to clarify the concept of household contents for inheritance tax purposes, taking into account today’s social reality. It concluded that:

• Household contents comprise the movable goods used in the family home or for the personal use of the deceased, as described in Article 1321 of the Spanish Civil Code, in connection with Article 4.4 of the Wealth Tax Act.
• The 3% presumption in Article 15 of the Inheritance and Gift Tax Act does not apply to all the assets in the estate, but only to those which, by their nature, value and function, may be for the private or personal use of the deceased, excluding all others.
• The following are not household contents: income-producing assets, assets used in professional or business activities and, in particular, money, securities and investments, which have no connection with the material items used in daily life or for personal development.

It is therefore not necessary to prove that such assets fall outside the household contents: this follows from their nature.

The judgment includes a partly dissenting opinion, which did not agree that Article 1321 of the Civil Code should be taken into account, as it refers to a different context from inheritance tax, and considered that there was already settled case law interpreting Article 15.

In conclusion, the new case law changes how the inheritance tax base is calculated and opens the possibility of requesting the correction of tax returns already filed.