SUCCESSION CUMULATION ABROGATED: HOW THE INHERITANCE TAX CHANGES

The Italian Revenue Agency (Agenzia delle Entrate) issued Circular No. 29/E of October 19, 2023, providing important clarifications on the application of the succession cumulation and donation cumulation, for inheritance and gift tax purposes. The circular retracts the agency’s previous position and aligns with the judicial positions that have consolidated over time.

Two key aspects:

The Revenue Agency has recognized that, for inheritance tax purposes, the succession cumulation must be considered “implicitly repealed”, with the consequence that it cannot be applied to determine the tax rates and calculate the exemptions. Consequently, the exemptions for inheritance tax and gift tax must be considered separate and distinct, meaning that a child can legitimately benefit from the one-million-euro exemption on donations received from their father during their lifetime and, subsequently, in the event of succession, can use the one-million-euro exemption on the assets they will receive as an heir of their deceased father.

The Revenue Agency also conforms to the consolidated position of the Court of Cassation, which was previously opposed by Circular No. 3/E/2008, stating that, for the purpose of determining the exemption, donations made in the period “between October 25, 2001, and November 29, 2006 (date of entry into force of the current regime)” are not relevant. Consequently, for the sole purposes of gift tax, the donation cumulation continues to apply, but it must exclude donations made during the period in which the inheritance and gift tax legislation was repealed.

It is recalled, for historical memory, that the cumulation institution is provided for in Legislative Decree 346/90 (the Italian Unified Text on Inheritance and Gift Tax, still applicable, albeit within the limits of what is compatible with the new inheritance tax reintroduced by Article 2, paragraphs 47-53 of Legislative Decree 262/2006):

– Article 8, paragraph 4 of Legislative Decree 346/90, in the context of inheritance tax.

– Article 57 of Legislative Decree 346/90, in the context of gift tax.

Under the previous tax system, inheritance and gift tax was organized in a system of progressive rates applicable by brackets, where Article 8, paragraph 4, Legislative Decree 346/1990, provided for the succession cumulation institution, which involved the fictitious merger of the actual value of the donations made in life by the de cuius to the heirs and legatees (i.e., the donatum), with the value of the estate (i.e., the relictum), in order to prevent the progressive nature of the tax from being evaded through the fragmentation of the estate (into a plurality of transfers).

The progressive-based taxation system ceased to exist with the introduction, by Law 342/2000, of a taxation system based on:

– Three fixed and proportional rates (4%, 6%, 8%), differentiated according to the family relationship between the grantor (de cuius or donor) and the beneficiary of the transfer (heir or donee).

– Exemptions, also differentiated according to the relationship between grantor and beneficiary.

With the introduction of the new legislative changes of Law 342/2000, two different theses emerged between the Revenue Agency and the judiciary (now superseded by Revenue Agency Circular No. 29/2023):

– With Circular No. 3/E/2008, the Revenue Agency argued that, for inheritance tax purposes, all donations made by the de cuius to the same beneficiary would be relevant (including those made during the period in which inheritance tax was repealed), further clarifying that the sum of relictum and donatum should not be used for the purpose of determining the rates, but only for the purpose of calculating the exemptions provided for by inheritance tax;

– The Court of Cassation, with several rulings, ruled that the succession cumulation was an “implicitly repealed” institution due to incompatibility with the new system of proportional rates introduced by Article 69, Law 342/2000 (which replaced the system of progressive rates by brackets) and can no longer be applied for either determining the rates or for calculating the exemptions.

Circular No. 29/E of October 19, 2023, has overcome these conflicts by confirming the principles already established over time by the case-law.