Active retirement: Exemption from assets affected by economic activities in the Estate Tax

Assets affected by economic activity: Wealth Tax Exemption

A subject regularly, personally and directly engages in various professional and business activities. Income from these activities is your main source of income. For the exercise of these activities you have hired two employees as full-time employees.

Once you have turned up your retirement age, you plan to exercise active retirement. However, it will continue to work under the same conditions, in its business and professional activities.

In the face of doubt whether when you move into the active retirement situation, the assets affected by the various economic activities will be exempted in the Wealth Tax, you refer a consultation to the Directorate-General for Taxes, who reminds you that:

1. The Supreme Court has already held that the existence of a retirement pension is a matter outside the tax legislation and, if the legal requirements for the tax benefit are met, the collection of that pension is not an obstacle to the origin of the tax pension.

2. Therefore, if the requirements for the activities carried out by the consultant to be classified as economic activities are met in accordance with the IRPF rules, and this activity:

• constitutes the taxpayer’s means of life;
• it is exercised in a regular and direct way by itself;
• personally adopts the management decisions necessary for the development of such activity; and
• is its main source of rent.

The fact that the consultant regularly, personally and directly performs the leasing activity in an active retirement situation, does not affect the application of the exemption of the common assets belonging to the profitable company affected by the activity.

Wealth Tax Exemptions: Business Equity

There are a number of wealth tax exemptions. The assets and rights of natural persons necessary for the development of their business or professional activity are exempt. To this end, the activity must be the main source of income of the taxable person, and that the taxable person exercises it on a regular basis, personal and direct (individual employer).

The assets and rights common to the two members of the marriage are also exempt when used in the development of the business or professional activity of either spouse, provided that the above requirements are met.

The following rules must be taken into account in the application of the exemption:

• (a) Business or professional activities are those of economic activity in accordance with IRPF rules. In particular, in relation to the leasing of real estate, when verifying the condition that at least one person employed with a full-time employment contract is used for the organisation of the activity.
• b) It is goods and rights affected by those which, regardless of their ownership (exclusive to the taxable person or shared with their spouse), are used for the purposes of the activity according to IRPF rules.
• c) The value of goods and rights is determined in accordance with IP rules. The debts of the activity reduce that value, but cannot be re-computed to determine the tax base of the tax. The requirements and conditions for the exemption to apply must be referred to the time when the accrual of this tax occurs.

Where the taxable person carries out more than one activity under the conditions indicated, the exemption reaches all the goods and rights affected by them, and in the calculation of the main source of income, the joint performance of those activities must be taken into account.

Watch out for un affectionate assets!

If the company carries out an economic activity and does not have the character of assets, it will enjoy exemption in the Estate Tax. However, that exemption only reaches the party affecting the activity…

50% requirement

The Estate Tax has been extended for another year and is again payable. However, remember that you can enjoy exemption for the company’s holdings if, among other requirements, you own at least 5% of its capital individually (or 20% together with the spouse, ancestors, descendants or collateral relatives until second grade) and do not have as its main activity the management of a furniture or real estate estate estate. In particular, this second requirement will be met if more than 50% of the asset is affected by economic activities.

50% count

To determine if you meet the 50% requirement, you will need to comply with the following:

• You must not compute the un affectionate elements whose acquisition value does not, as a whole, exceed the reserves generated by the company by carrying out economic activities in the last ten years.
• In addition, you may default on this requirement for 90 days a year.

Let’s give an example: In the following case, if you have 100,000 euros of reserves generated in the last ten years, the company will not be patrimonial and you can enjoy the exemption.

The portion of the asset to be considered affected will be 68%: (180,000 + 60,000 + 100,000) / 500,000

Exempt party

The fact that the company meets the requirement of the 50% indicated, implies that you will be entitled to enjoy the exemption in the Estate Tax. But watch out! because such an exemption shall apply only to the value portion of the company corresponding to the assets affected.

To do this, you’ll need to apply the following formula: % with incentive – Affected assets – Debts for affected assets / Net worth

Continuing with the example above: In the above case the exemption can only apply to 60.71% of the value of the company [(180,000 + 60,000 – 70,000) / 280,000], and you must tax on the Estate Tax for 39.29% of the value of the shares. But do not be confused, when calculating this percentage are not counted as greater assets affected the profits of the last ten years. This is only possible when determining whether the 50% rule is met!

Act before the end of the year

Before the end of the year, it is desbersed to verify that it is possible to do something that will vary some of the amounts of the indicated formula and thus increase the percentage of the shares entitled to exemption. Thus, in the above case, if you sell the investment fund for 50,000 euros (increasing its own funds by 7,500 euros) and spend 50,000 euros to cancel debts of the activity; the percentage entitled to deduction would increase to 76.52%: [(180,000 + 60,000 – 20,000) / 287,500].

Check if before the end of the year you can do something to increase the percentage of value of the company entitled to exemption. A good alternative is to sell unae affection assets and allocate the amount invested to cancel debts from the activity.

If you have any questions or need any clarification about active retirement, you can contact

any of our advisors so we can help you resolve it.