The succession agreement and its tax effects

Act 10/2008 of 10 July, on Book Four of the Civil Code of Catalonia, provides for three types of succession: testate (by will), intestate (by law) and contractual.

Contractual succession is prohibited under the Spanish Civil Code (Article 1271.2): no contracts may be entered into regarding a future inheritance, except those aimed at dividing the estate during the owner’s lifetime or other partition arrangements, in accordance with Article 1056.

The Spanish Civil Code therefore only allows an heir to be appointed by will, and an appointment made in any other instrument (such as a succession agreement) would be void. The succession agreement is only permitted in certain regions of Spain, including Catalonia, Aragon and Galicia.

The succession agreement is regulated in Articles 431-1 to 431-17 of the Civil Code of Catalonia. It can be defined as a binding agreement between two or more people, which may even name a third party as beneficiary. Unlike a will, a succession agreement can transfer assets during the lifetime of the person making it, and it can only be changed with the full agreement of all the parties.

As a general rule, a succession agreement is irrevocable (with some exceptions), unlike a will; this contract made during one’s lifetime cannot be changed without the agreement of all the parties.

There must be at least two parties, and they must be related in certain ways (Article 431-2 of the Civil Code of Catalonia):

• Spouse or future spouse
• Stable partner
• Relatives in the direct line without limit of degree (parents and children) or in the collateral line up to the fourth degree, by blood or by marriage (siblings, cousins, uncles and aunts, nephews and nieces)
• Blood relatives of the other spouse or partner in the direct line (parents-in-law) or in the collateral line up to the second degree (brothers- and sisters-in-law)

However, the beneficiary of the succession agreement may or may not be a relative. It could even be a foundation or a company.

Unlike a will, which is a unilateral, strictly personal and revocable act, a succession agreement is a contract between two or more people governing a succession. It can therefore only be changed or terminated by agreement of the parties, and it cannot be revoked unilaterally, except:

• Unilateral revocation (Article 431-14) on the following grounds:
  • Grounds expressly agreed
  • Failure to meet the obligations imposed on the beneficiary
  • The purpose that was decisive for the agreement, or for any of its provisions, can no longer be achieved
  • A substantial, supervening and unforeseeable change in the circumstances on which it was based
• Revocation for unworthiness to inherit (Article 431-13).

A succession agreement can arrange the succession to the same extent as a will (Article 431-5):

• Appointing heirs (heretaments),
• Making specific allocations (similar to legacies in a will),
• Imposing obligations (such as caring for one of the parties or for third parties),
• Appointing executors, administrators and partitioners,
• Waiving certain inheritance rights (with some limitations).

Unlike a will, however, a succession agreement is a formal transaction (ad solemnitatem): it must be executed by public deed, or it will be void (Article 431-7.1). Succession agreements must be recorded in the General Register of Last Wills, and the notary who authorises the deed must make the corresponding notification (Article 431-8.1).

In addition, during the lifetime of the person making it, it is possible to:

• Register in the Land Registry the appointments of heirs and specific allocations made in the succession agreement (Article 431-8.2).
• Record in the share register or members’ register the registered shares or holdings covered by the succession agreement (Article 431-8.3).
• Register in the Companies Registry the arrangements for the continuity of a family business made in the succession agreement (Article 431-8.4).

Finally, a breakdown of the marriage or partnership does not affect the succession agreement unless otherwise agreed, or unless an allocation was made in favour of the spouse or partner (or their relatives) that would not have been made but for the marriage or partnership (Article 431-17).

How succession agreements are treated for tax purposes

For tax purposes, succession agreements under which assets are transferred during the lifetime of the person making them are treated as a transfer on death made during the deceased’s lifetime. In general, therefore, they are only subject to the tax on transfers on death (Inheritance Tax).

In a simple appointment of an heir, where the heir is appointed with effect from the death, the transfer takes place on death and the tax becomes due then. If assets are handed over during the person’s lifetime, this is treated as a gift and is taxed as a gift — and therefore also as a capital gain.

In a cumulative appointment (heretament cumulatiu), the heir is appointed and the assets are allocated from the moment the agreement is signed. In this case, Inheritance Tax applies and becomes due when the agreement is signed. Article 33.3 of Act 35/2006 on Personal Income Tax also applies, so the transferor does not have to declare any capital gain.

Finally, in agreements making specific allocations, if the assets are handed over immediately, this is treated as a gift and is subject to Gift Tax, and also to personal income tax as a capital gain.