Family business inheritance in Madrid: 99% reduction in inheritance tax from 2026

Key data

Business families based in the Community of Madrid have had, since July 23, 2026, a first-rate tax advantage: the Law 3/2026, of June 30, on Support for Family Business establishes a 99% reduction in Inheritance and Gift Tax for the acquisition of family businesses, both by inheritance and by gift. This means that, in practice, you only pay tax on 1% of the transferred value.

The regulation not only consolidates an existing benefit: it expands it significantly in terms of who can benefit and under what conditions. If you have a family business in Madrid and are thinking about succession, this law completely changes the scenario.

What does this regulation establish?

Law 3/2026 introduces several specific modifications to Madrid's ISD for the transfer of family businesses. Below are the key changes:

Regarding the requirement of participation in the capital of entities, the law expands the perimeter of the kinship group that is taken into account to compute such participation. This makes it easier for more family structures to meet the requirements and access the reduction.

Economic and operational impact

The economic impact of this regulation is direct and quantifiable. Before Law 3/2026, a gift of a family business could generate a much higher tax bill than an equivalent inheritance, discouraging lifetime transfers. Now, both methods are taxed equally: at 1% on the transferred value.

The two changes with the greatest operational impact are:

• Gift-inheritance equalization: Allows planning succession during lifetime without tax penalty. The founder can transfer the business to heirs gradually, without waiting for death.
• Expansion of the circle of beneficiaries: Nephews and cousins (collaterals of fourth degree by consanguinity or affinity) can now receive the business with the same 99% reduction. This is especially relevant in businesses where there is no direct descent or where the natural continuity of the business falls to relatives of the second or third degree.

Additionally, the expansion of the kinship perimeter for computing capital participation makes it easier for more family groups to exceed the minimum participation threshold required to access the reduction, opening the door to more diversified shareholder structures.

Who does it affect?

• Owners of family businesses with tax domicile or main activity in the Community of Madrid.
• Heirs and donees of Madrid family businesses: children, spouses, parents (Groups I and II), but also now nephews, cousins and collaterals of fourth degree by consanguinity or affinity (Group III).
• Business families that are planning the generational succession of the business, both by inheritance and by lifetime gift.
• Tax advisors, family lawyers and family business consultants who manage transfer operations in Madrid.
• Family corporate structures where capital participation is distributed among several relatives and previously did not reach the minimum participation threshold.

Practical example

Suppose a Madrid family business valued at €2,000,000. The founder wants to transfer it to his nephew, who has worked in the business for years and is the natural successor, but has no children.

Before Law 3/2026: The nephew belongs to Group III of ISD. Without the 99% reduction for this group, the taxable base could be the full value of the business (€2,000,000), with tax rates in Madrid that can range from 7.65% to 34% depending on the bracket, resulting in a tax bill of hundreds of thousands of euros. Furthermore, if the transfer was by gift, the treatment was even less favorable.

With Law 3/2026: The nephew applies the 99% reduction. The effective taxable base is reduced to €20,000 (1% of €2,000,000). The tax to pay is minimal, allowing business continuity without the tax burden forcing asset sales or debt to pay the tax. And if the founder decides to make the gift during lifetime, the treatment is identical to that of inheritance.

What should companies do now?

1. Review the family succession plan: If you have a family business in Madrid and don't have an updated succession plan, now is the time to develop one. The 99% reduction applies now, for both inheritances and gifts.
2. Identify potential beneficiaries: Check if the natural successors of your business (children, nephews, cousins) belong to Group III or are collaterals of fourth degree. They can now also benefit from the reduction.
3. Verify compliance with the capital participation requirement: With the expanded perimeter, review whether your family shareholder structure meets the new requirements to access the reduction. You may not have reached the threshold before and now you do.
4. Consider lifetime gift as an alternative to inheritance: With equalized tax treatment, lifetime gift becomes a succession planning tool as efficient as inheritance. Consult with your tax advisor about the implications of each option.
5. Properly document the transaction: To apply the reduction, the business must meet the family business requirements established in the regulation. Make sure corporate and tax documentation is in order before initiating any transfer.

Official source

View complete regulation in official source

Notice: This article is for informational purposes only and does not constitute legal advice. For specific decisions, consult a qualified professional. Source: https://www.boe.es/diario_boe/txt.php?id=BOE-A-2026-16019