The Superior Court of Justice of Madrid (TSJM) has ruled in favor of the Community of Madrid in a case related to the Inheritance and Donation Tax. The heirs must pay 16,384.08 euros after determining a loan that the deceased made to them while he was alive must be integrated into the estateand, therefore, pays said tax.
As detailed in the October 2024 ruling, in 2013 (before dying) the deceased granted a loan of 205,000 euros to his sister and brother-in-law for the purchase of a home to be repaid over 8 years. When the date of death arrived, 2019, the amortization period had not passed nor had evidence been presented that it had been returned.
At the time of settling the Inheritance Tax on the deceased’s inheritance, the Tax Inspection of the Community of Madrid considered that the loan was still part of the deceased’s assets and had to be included in the estate to calculate the tax, something the heirs did not agree with.
Justice considers that the heirs will have to pay taxes on the money borrowed
The heirs took the case to the Regional Economic-Administrative Court (TEAR), to consider that the debt had disappeared due to what is known as “confusion of rights”, which means that the person becomes both a creditor and a debtor of the same loan, something that would have happened after receiving the inheritance, and according to article 1,192 of the Civil Code, when this occurs the obligation will be extinguished.
He TEAR admitted said appeal, annulling the tax settlement, considering that this loan was not part of the estate. Following the decision, the Community of Madrid filed a contentious-administrative appeal before the TSJM in which they argued that the loan should be considered part of the deceased’s assets, as provided in article 659 of the Civil Code, which establishes that “Inheritance includes all the assets, rights and obligations of a person that are not extinguished by his death.”
Finally, and after analyzing the facts, according to the ruling, The Superior Court of Justice of Madrid resolves that said loan is part of the estateand they point out that the argument of the heirs ““It totally distorts the concept of determining the estate, prior to the partition operations, which would violate the rules of respect for legitimacy and would render the Inheritance Tax ineffective.”
The court adds that if so “It would be enough to constitute a loan contract for the entire assets in favor of those who are going to establish an heir with a very long term date and foreseeable non-compliance before the death of the lender, to avoid paying the Tax.”
Considers that the aforementioned article 659 of the Civil Code, which establishes “Inheritance includes all the assets, rights and obligations of a person, which are not extinguished by his death.”considering that the credit right was still in force at the time of death, since no evidence of its cancellation was presented.
It also refers to article 3.a of the Inheritance and Donation Tax Law, which establishes that any acquisition of assets and rights by inheritance constitutes a taxable event. And it cites article 9 of the same law that considers the real value of assets and rights at the time of death.
Based on all this, the court issues its ruling, agreeing with the Community of Madrid and condemning the heirs to pay the 16,384 euros that corresponded to inheritance tax for the amount of said loan.