The issue of inheritances and capital gains has been one of the most debated topics among heirs and tax experts in Portugal. Until recently, selling your share of an inherited property, especially when the estate had not yet been divided, could result in a hefty IRS tax bill on capital gains. However, a recent decision by the Supreme Administrative Court has radically changed this scenario, bringing relief and new opportunities to thousands of taxpayers.
1) What are undivided inheritances and capital gains?
2) The previous understanding of the IRS
3) What has changed with the Supreme Administrative Court?
4) Implications for taxpayers
5) How to deal with this new reality?
6) The future of inheritances and capital gains in Portugal
What are undivided inheritances and capital gains?
When a person dies and leaves assets to their heirs, these assets form an inheritance. As long as there is no formal division, the inheritance is considered undivided and belongs to all the heirs together. Each heir has a ‘hereditary share’, i.e. an abstract share of the inheritance, which can include real estate, bank accounts or other assets.
In turn, capital gains refer to the profit made on the sale of an asset, such as a property. As a rule, the sale of property is subject to IRS on capital gains, which has a direct impact on the net amount received by the seller.
The tax authorities' previous view
For years, the Tax and Customs Authority (AT) argued that the sale of a hereditary share, i.e. an heir's share of an undivided inheritance, was equivalent to the sale of a property. It therefore required the payment of IRS on the capital gains resulting from this transaction. This interpretation led many taxpayers to pay high taxes when selling their share of the inheritance, even though they had never enjoyed the property in question.
What has changed with the Supreme Administrative Court?
The Supreme Administrative Court (STA) recently contradicted the AT's view. In a ruling that standardised case law, the STA clarified that the sale of a hereditary share does not constitute an onerous alienation of rights in rem in immovable property. In practical terms, this means that when selling their share in an undivided inheritance, the heir is not directly selling the property, but rather their position in the inheritance.
As a result, any gains made on this sale are not subject to capital gains tax. This decision standardises case law and obliges the courts to follow this understanding in future cases, protecting the interests of the heirs.
Implications for taxpayers
This change is especially relevant for those who inherited property jointly with other family members and, for whatever reason, want to sell their share before the inheritance is formally divided. Now, when selling their inheritance share, the heir will not have to pay IRS on capital gains, unlike before.
In addition, taxpayers who have already paid capital gains tax in similar situations can request an unofficial review by the Tax Authority. If the review is not favourable, they can also appeal to the courts, where the STA's new guidance will be decisive.
How should you act in the face of this new reality?
If you are thinking of selling your share in an undivided inheritance, it is important to consult a lawyer or accountant specialising in inheritance and tax law. Make sure that the transaction is correctly documented as a sale of an inherited share and not as a direct sale of property, to avoid problems with the tax authorities.
If you have already paid IRS on capital gains in a similar situation, gather all the documentation and ask for the process to be reviewed. This could be your chance to recover the amounts you paid unduly.
The future of inheritances and capital gains in Portugal
The decision by the Supreme Administrative Court marks a new chapter in the taxation of inheritances in Portugal. By clarifying that the sale of an inheritance is not subject to IRS on capital gains, an important precedent has been set that could influence future legislative changes and the actions of the Tax Authority.
For heirs, this is a significant victory that brings fairness and transparency to the inheritance tax system. At the same time, it reinforces the importance of paying attention to court rulings and seeking specialised advice on inheritance and capital gains.
If you have inherited a property and are considering selling your share, know that the law is now on your side. Take advantage of this new reality to make more informed decisions and protect your assets.
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