Family business: could renting a property to a relative cost you your Wealth Tax exemption?
For many families, their business is the result of years —sometimes generations— of work. Spanish law recognises that effort with an important benefit: a Wealth Tax (Impuesto sobre el Patrimonio) exemption for the assets and shares tied to a qualifying family business. This is no minor point. That exemption is also the gateway to the reduction in Inheritance and Gift Tax when the business passes to the next generation. In other words, losing the Wealth Tax exemption can make a future inheritance or gift considerably more expensive.
One of the key requirements is that the assets are genuinely “assigned” to the economic activity —that is, used for the business and not for private purposes. And this is where a very common question arises: what happens when that property is rented to a family member?
— The question Spain’s Supreme Court will settle —
The Supreme Court has agreed to hear an appeal to clarify exactly this: whether renting a property to a relative, at market price, allows the Wealth Tax exemption on business-assigned real estate to be maintained.
The nuance matters. Handing a property to a relative for free or below market value —easily read as private use, which could break the “assignment” requirement— is very different from renting it out on normal market terms, as you would to any third party. A ruling from the highest court will bring certainty to many family businesses currently operating in that grey area, especially in structures where properties are leased within the family group or to companies owned by the same shareholders.
Until that ruling arrives, the message is caution: how you document and value these rentals can be the difference between keeping or losing a highly valuable tax benefit.
— What this means for your family and your business —
If you hold property inside a family business and some of it is rented to relatives, it is worth checking three things: that the rent is at market value and well supported, that there is a formal, valid lease in place, and that the use of the property fits the company’s activity. These seemingly minor details are precisely what the tax authorities scrutinise when they challenge an exemption.
Wealth and succession planning for a family business is not improvised: it is built over time and reviewed regularly to confirm the requirements are still met. At EBF Consulting we help families and companies, including international clients with assets in Spain, protect this benefit and prepare the generational handover with confidence. If you hold property inside your family business, let’s talk before a small detail becomes a problem.