Reduction of Gift Tax: What Would Be the Impact?

We are approaching the stage at which President Kast’s administration is expected to submit its tax reform bill to Congress. As previously anticipated, the proposal would include a number of both pro-growth and revenue-raising measures. Among these, according to statements made by the Minister of Finance himself, the bill is expected to introduce a temporary 50% reduction in inheritance and gift tax (Impuesto a las Herencias y Donaciones, the “IHD”), together with the elimination of the court approval requirement (insinuación) for gifts.

The tax benefits of gifts

Gifts in Chile are currently subject both to a court approval procedure (insinuación) and to inheritance and gift tax. The IHD is a progressive tax applied on brackets, with a top marginal rate of 25%.

For those of us who advise high-net-worth individuals and business families, gifting is a particularly valuable planning tool in the context of intergenerational family business reorganisations, as it allows younger generations to become involved in the family enterprise in a highly tax-efficient manner and without triggering capital gains tax.

Consider the following example. Assume that a family patriarch owns 100% of a corporation with an economic value of CLP 10 billion (for purposes of this example, we will disregard distinctions relating to entity type and valuation methodology). Since his three children are about to become actively involved in the business, he intends to transfer 10% of the company to each child (i.e., shares worth CLP 1 billion each).

His initial idea is to sell the 10% stake to each child. This would trigger personal income tax (Impuesto Global Complementario) on the gain realised in the transaction, resulting in tax of approximately CLP 1.2 billion (40% applied to a gain of CLP 3 billion). This is where planning becomes relevant: what happens if, as a legitimate exercise of tax planning (economía de opción), the transaction is structured instead as a gift?

If the shares are transferred by way of gift, the transfer would be subject instead to inheritance and gift tax in an amount of approximately CLP 350 million.

The potential impact of the proposed reform

The text of the reform bill has not yet been released, and the mechanics of the proposed 50% reduction—which has no recent precedent—remain unclear. That said, the most straightforward approach would be to apply a 50% reduction both to the applicable tax rates and to the bracket adjustments within the progressive scale.

What would be the practical effect? Returning to our example, instead of CLP 350 million, the transfer would be subject to inheritance and gift tax of approximately CLP 175 million, i.e., half of the current tax burden. In other words, the tax cost would fall from CLP 1.2 billion to CLP 175 million for the transfer of shares valued at CLP 3 billion. This difference alone would justify accelerating the transfer of family wealth to the second (and even third) generation, while simultaneously involving them in the management of the family business.

In addition, it is anticipated that these gifts would be exempt from the court approval procedure (insinuación), which would significantly speed up the transfer process, as such approvals can currently remain pending before the courts for several months.

In wealth planning, timing is everything. A temporary reduction of inheritance and gift tax, combined with the elimination of the insinuación requirement, would open a unique planning window within the Chilean tax system. While we await for the reform bill, this is an ideal time to begin reviewing existing wealth-holding structures in order to determine how best to take advantage of this opportunity and be prepared to act quickly when the moment arrives.