New Family Business Law in Madrid: 99% Reduction on Inheritance and Gifts

Introduction

On 30 June 2026, the Official Gazette of the Community of Madrid published Law 3/2026, of 30 June, on Support for Family Businesses, in force since 1 July. This is not a minor reform: it raises the tax reduction applicable to the transfer of family businesses, whether by inheritance or gift, from 95% to 99% of the taxable base under the Inheritance and Gift Tax, widens who can benefit from it, and cuts in half the period during which the heir or recipient must keep the business in their estate.

For any family that owns a business and is thinking, even in the abstract, about how it will be passed on one day, this law is worth a close read, though how much it actually changes depends above all on who ends up receiving the business. I explain it here with the level of detail that matters to someone who has to make real decisions, not just read headlines: what it actually changes, who now falls within the circle of beneficiaries, what requirements have to be met to keep the reduction, and why a tax benefit like this one, generous as it is, does not replace proper planning.

What Law 3/2026 actually changes

The law amends articles 21, 22 and 22 bis of Legislative Decree 1/2010, of 21 October, which consolidates the Community of Madrid’s legal provisions on taxes ceded by the State. That is the rule that, among other things, governs the region’s own reductions under the Inheritance and Gift Tax, and it is where the changes that matter to family business owners are concentrated.

It does not replace the general 95% state reduction set out in the Inheritance and Gift Tax Law for family businesses: it improves on it within the Community of Madrid and softens several of the requirements that, until now, left out quite a few families who, in practice, also run and sustain the business.

The reduction rises from 95% to 99%

This is the most visible change: the reduction on the taxable base applicable to the value of the individual business or the shareholding in the family entity goes from 95% to 99%, both for mortis causa acquisitions (inheritance) and inter vivos ones (gifts). In practical terms, of the value of the business transferred, only the remaining 1% is taxed, compared with 5% until now.

For a family business of significant value, the difference between a 95% and a 99% reduction is not a nuance: on the final tax bill it can mean a rebate of several percentage points on the total due, precisely on the part of the estate that worries families most, the business they live off.

An important nuance: who this increase actually benefits

Before going further, there is a distinction that rarely gets mentioned alongside the headline: Madrid already grants a 99% rebate on the final tax bill (not the taxable base) of the Inheritance and Gift Tax for spouses, children, grandchildren, parents and grandparents (kinship Groups I and II), on any inherited or gifted asset, not just family businesses, with no activity or holding requirement attached, provided the transfer is formalised before a notary.

That means that if a child inherits the family business from their parents in Madrid today, they already pay roughly 1% in tax thanks to that general rebate, whether or not the business qualifies as a “family business” for tax purposes. For that heir, raising the base reduction from 95% to 99% changes relatively little on the final bill, because the general rebate was already wiping out almost everything that remained.

Where it does make a real difference is for those who do not have that general rebate: collateral relatives (siblings, nephews and nieces, aunts and uncles, third- and fourth-degree cousins), who in Madrid only get a 50% rebate on the final bill, and key employees with no family tie, who get none at all. For them, the 99% reduction on the taxable base is, in practice, the main tax relief available, and there the difference between 95% and 99% is substantial.

Who can benefit now: extended family and key employees

The law also widens the circle of beneficiaries, and this is where many families who used to fall outside the benefit start to come within it:

• The traditional kinship groups (Groups I, II and III: descendants, spouse, ascendants, and collateral relatives up to the second and third degree) keep access to the reduction.
• Fourth-degree collateral relatives, by blood or marriage, are now expressly included, having previously been excluded.
• More novel still, key employees of the business with no family tie can also benefit, provided they can show at least ten years on the payroll and at least four consecutive years in management functions.

This last change makes economic sense: it recognises that, in quite a few family businesses, the person best placed to carry the project forward is not always a direct relative, but someone trusted who has been there for years. Until now, passing the business to that person was, tax-wise, far more expensive than leaving it to a relative; the law narrows that gap.

The requirements you need to meet

The reduction is not automatic simply because you inherit or receive a stake in a family business. Several requirements have to be proven, and the law keeps them substantially in line with state rules, with a few local nuances:

• That the deceased or donor carried out the business activity habitually, personally and directly, and that income from that activity accounted for more than 50% of their income from employment and business activities.
• For shareholdings in an entity, a minimum holding of 5% individually, or 20% counting the family group, with effective, remunerated management functions accounting for more than 50% of that year’s income.
• That whoever receives the business or the shareholding keeps it in their estate for the following five years from the date of the inheritance or the gift.

That last point, the holding period, is also one of the law’s most significant improvements, and I explain it in the next section.

Inheritance and lifetime gifts: what changes in each case

The law treats inheritance and gifts in parallel, with the same 99% reduction and comparable requirements, but with two changes worth distinguishing:

The holding period drops to five years, for both succession and gifts, compared with the ten years generally required under state rules for anyone not applying a more favourable regional reduction. Five years is a far more manageable horizon for a family that, say, anticipates a partial sale of the business or the entry of an investor partner in the medium term.

For lifetime gifts, moreover, the minimum age requirement for the donor disappears. State rules generally require the donor to be 65 or older, or in a situation of permanent incapacity or severe disability, to apply the reduction. The Community of Madrid removes that requirement. In practice, this opens the door to planning the handover of the business during the donor’s lifetime, with the tax reduction, before reaching that age — particularly relevant for anyone who wants to pass the baton while still able to stay closely involved in the transition, rather than waiting for an age set by law.

It is worth keeping in mind, though, that this flexibility is a regional change and only affects the Inheritance and Gift Tax. The donor’s income tax exemption on the capital gain generated by the gift (Article 33.3.c of Spain’s Personal Income Tax Law) is a state-level rule that still requires the donor to be 65 or older, or in a situation of permanent incapacity. In other words: even though Madrid no longer requires that age to apply its own reduction, a parent who gifts the business before turning 65 could still owe income tax on the resulting gain, even if the child pays almost nothing in inheritance and gift tax. Before planning a lifetime gift around this advantage, that piece needs checking too.

For collateral relatives and key employees, the limitation goes further still: Article 20.6 of the Inheritance and Gift Tax Law, which that IRPF exemption refers to, only covers gifts to a spouse, descendants or adopted children. It does not cover ascendants or collateral relatives. So gifting the business during your lifetime to a sibling, a nephew or niece, or a key employee with no family tie means you will owe income tax on the resulting gain regardless of your age. On this point, Madrid’s benefit is limited to the Inheritance and Gift Tax itself and does not carry over to your own income tax return.

What happens if the holding period is not met

It is worth keeping in mind before taking the reduction for granted: if, during those five years, the holding requirement is breached — for example because the business or the shareholding is sold, or a disposal act substantially reduces the value of what was acquired — it has to be reported to the Tax Administration within thirty business days of the breach, and the portion of tax that was not paid has to be settled, together with the corresponding late-payment interest.

This is not a penalty, it is a regularisation: you pay what you would have paid without the reduction, plus interest for the time elapsed. But it is one more reason why any decision about the future of inherited or gifted shareholdings, in those following five years, should be made with this condition on the table, not as a surprise after the fact.

A tax reduction is not a plan

This law solves a real problem, the tax cost of transferring a family business, and it solves it well. But a tax benefit should not be confused with a complete succession plan. The 99% reduction applies to a transfer that, to actually happen without conflict, still needs the same pieces it always has: a will or a family protocol that clearly reflects who receives what and why, corporate bylaws that anticipate how the business is managed while there are several co-owner heirs, and, when the founder starts losing decision-making capacity before succession is resolved, instruments such as the preventive power of attorney or autocuratela (self-guardianship), which we have already covered in detail on this blog.

In fact, we have already written about what happens when that planning is not done in time and a founder’s cognitive decline coincides with an unresolved succession: in The Crossroads of the Family Business: Cognitive Decline, Law 8/2021, and Corporate Control, we explain how that combination can paralyse an entire business for months, regardless of how generous the tax treatment turns out to be on the day the transfer finally happens. A 99% reduction is not worth much if, before it can be applied, the family first has to go through a court dispute over who decides.

The right way to read this law, for anyone with a family business in Madrid, is as an opportunity to review, now, with the most favourable tax treatment this transfer has ever had, how the underlying succession is organised. Not just how much it will cost to transfer the business, but to whom, when, and with what safeguards if something does not go as planned.

In summary

Law 3/2026 on Support for Family Businesses, in force in the Community of Madrid since 1 July 2026, raises the Inheritance and Gift Tax reduction for family businesses from 95% to 99%, for both inheritance and gifts, widens beneficiaries to include fourth-degree collateral relatives and key employees with at least ten years of service and four in management, cuts the required holding period from ten to five years, and removes the minimum donor age for lifetime gifts.

It is, by some distance, the most favourable tax framework Madrid has ever had for transferring a family business. But it remains just the tax framework: the part that decides whether the succession actually lands well — who manages, who decides in case of disagreement, what happens if the founder loses capacity before it is resolved — still depends on proper estate and corporate planning. At Alta Mediación we support both sides of the process: the practical application of this reduction to each family’s specific transfer, and the upfront design — will, family protocol, preventive powers of attorney — that lets that transfer happen without conflict.