Recap on the Hot Topic of Hereditary Shares in Personal Income Tax (IRS)

1. The Fundamental Divergence Between the AT and Taxpayers

In the Portuguese legal system, it is well-established that as long as an inheritance remains undivided—that is, prior to the partition (partilha)—heirs are not the owners or holders of an individual right over each of the specific assets that comprise it. Instead, each heir holds only a right to an ideal share of a mass of assets, which constitutes an autonomous estate (património autónomo). Only upon partition does this abstract right materialize, making specific assets certain and determined for each heir and transforming them into the full holder of the property right over them.

Despite this theoretically clear situation, the AT defended a perspective focused on the economic result of the operation. It argued that whenever a share of an inheritance consisting of real estate was sold, or when heirs jointly sold a property belonging to the undivided inheritance, what occurred in practice was the disposal of a real right of property by the heirs. Consequently, the AT considered these operations to constitute an "onerous alienation of real rights over immovable property," applying the charging provision of Category G of the IRS (Article 10(1)(a) of the IRS Code) and assessing tax on any capital gains generated, imputing the gains to each heir in proportion to their respective share.

2. The Unification of Case Law (STA Ruling No. 7/2025)

In arbitral decision No. 524/2023-T, a case arose involving heirs who executed a deed for the "purchase and sale of a hereditary share" concerning an unliquidated and undivided inheritance which, declaredly, consisted of a single real estate asset. In this situation, the arbitral tribunal ruled in favor of the taxpayers, annulling the respective additional IRS assessment. Dissatisfied, the AT appealed to the STA seeking a unification of case law, given the conflict between that decision and an older arbitral decision (Case No. 176/2017-T), which had considered the sale of a share of a property before partition to be an alienation of a real right generating taxable capital gains.

Called to rule on this matter, on April 29, 2025, the Full Bench of the Tax Litigation Section of the STA issued Ruling No. 7/2025, unifying case law to the effect that: "The alienation of a hereditary share does not constitute 'onerous alienation of real rights over immovable property' under the terms of Article 10(1)(a) of the IRS Code." The STA based its decision on Succession Law, reiterating that while the inheritance remains undivided, each heir is merely the holder of a right to an ideal share of a mass of assets. It emphasized that alienating a right over an autonomous estate (the hereditary share) is not the same as alienating a property right over a specific building, regardless of whether the inheritance consists of a single asset. Thus, it concluded that only through partition does the abstract right to the inheritance materialize. Since the transfer of the share conveys only an abstractly considered and ideally defined right, there is no onerous alienation of real estate susceptible to IRS taxation.

3. The AT's Reaction: Administrative Circular No. 20281/2025

Approximately two months later, the AT issued Administrative Circular (Ofício Circulado) No. 20281/2025 of July 25, 2025, intended to adapt the services' conduct to the new STA case law. However, as expected, it did so by adopting a highly restrictive interpretation, opening new avenues for litigation. It determined that the non-taxation would apply only to cases where the deed unequivocally demonstrated the transfer of the right to the inheritance or the hereditary share "as a whole" (Point 2 of the Circular).

Furthermore, through paragraphs 5 and 6 of the same Circular, the AT drew new boundaries, instructing services that in cases where heirs jointly alienated a specific and determined real estate asset belonging to the undivided inheritance, those operations would no longer be seen as the alienation of the right to the inheritance, but rather as the transfer of a specific asset, the gains from which would continue to constitute taxable capital gains under Category G.

4. New Controversy: The Sale of a Specific Asset (Case 1318/2024-T)

The stage was set for a new controversy, which involved arbitral case No. 1318/2024-T. This concerned an undivided inheritance composed of several assets, from which the heirs sold a specific asset—a rural property. The alienation of this asset to a third party was for €4,100,000, formalized through a deed expressly designated as "purchase and sale." The AT argued that, since there were other assets and the deed titled the sale of a perfectly identified asset to the exclusion of others, this was not a transfer of a share or a universality, but the effective transfer of the property right over the building.

The arbitral tribunal rejected the AT's claim, declaring the assessment illegal and ordering the AT to refund the tax with compensatory interest. It grounded its decision on the fact that the designation "purchase and sale of real estate" in the deed was incorrect, since heirs do not hold any individual property right over the assets prior to partition. CAAD stressed that no legal provision requires the alienation of succession rights to cover all assets of the inheritance, concluding the sale did not constitute an "onerous alienation of real rights" under Article 10 of the CIRS.

5. The Recent STA Ruling of December 17, 2025

Faced with this new arbitral defeat, the AT appealed to the Full Bench of the STA (Case No. 0136/25.5BALSB), citing a conflict with the arbitral decision in Case No. 1274/2024-T. In that decision (and others favorable to the AT), the tribunal had understood that executing a "purchase and sale" of an exactly described asset at a set price demonstrated the intent to alienate a concrete asset (real right) rather than an abstract legal position, justifying taxation.

On December 17, 2025, the STA ruled on this appeal, not to point out the clear differences between the situations, but to decide, unanimously, not to hear the merits of the AT's appeal. It considered that the CAAD decision (Case 1318/2024-T) was already fully compliant with the case law consolidated months earlier by Unification Ruling No. 7/2025. Moreover, as mentioned, the STA closed the dispute with a harsh critique of the AT, stating that its commitment to the public interest requires compliance with the positions established in case law unification rulings.

6. New Chapters in 2026: AT Resilience and the Setback in the TCAS

The warning that the open legal frontier would dictate new litigation materialized quickly in early 2026. The AT, far from retreating, reaffirmed its position in Binding Ruling (Informação Vinculativa) No. 29377 of March 13, 2026. Regarding a taxpayer who alienated an inherited property—the sole asset of the inheritance but transferred via a contract for the purchase and sale of an autonomous unit—the Tax Authority applied the restrictive doctrine of Circular No. 20281/2025. The AT concluded it was the sale of a specific asset and not the transfer of the right to the inheritance as a whole.

Even more significant was the validation of this interpretation by a higher court. In a ruling issued on February 26, 2026 (Case 1269/20.0BELRS.CS1), the South Central Administrative Court (TCAS) granted an appeal by the Tax Authority (Fazenda Pública), overturning a first-instance decision that had favored a taxpayer. According to the TCAS, the alienation of a hereditary share (a non-taxable transfer of a global legal position) is one thing; the alienation of specific real estate assets integrated into the inheritance is quite another. The court emphasized that the distinction must adhere to the wording of the public deed itself. When the deed titles the sale of a specific property by the heirs, an onerous transfer of the property right effectively occurs, falling under the capital gains charging provision, regardless of whether the inheritance is undivided.

7. Conclusion

The evolution of this case law has consistently favored taxpayers, consolidating the view that the determining factor for tax purposes is the state of indivision of the hereditary pool. Regardless of whether the inheritance consists of a single property or multiple assets, and whether heirs formally sell the "share" or sign a "purchase and sale" deed for a "specific and determined asset," the tax result is the same. As partition has not occurred, the heirs never acquired a real property right, acting always as holders of a right to a universality. When alienating an inherited property to a third party, what occurs is merely an asset substitution within the autonomous estate: the property leaves, and the monetary value enters in its place. The inheritance remains undivided over the remaining assets and this new value, and no taxable gains exist in the heirs' sphere. Therefore, without prior partition, these operations do not constitute an "onerous alienation of real rights over immovable property" under Article 10(1)(a) of the IRS Code, and the taxation of capital gains under Category G in the individual heirs' sphere is unlawful.

However, it is difficult to understand why, in its second and recent ruling of December 17, 2025, the STA downplayed the significant difference in factual situations. While the basis for Ruling No. 7/2025 was a "hereditary share" in a single-asset inheritance, the second case (Case 1318/2024-T) concerned the joint sale of a specific building from a multi-asset inheritance, formalized by a "purchase and sale" deed, which was part of an inheritance composed of a plurality of assets that remained undivided and belonging to the same heirs in the same proportions. By refusing to hear the merits of the appeal on the grounds that the non-taxation of this individualized sale already followed linearly from the rule unified for hereditary shares, the STA seems to have ignored the complex boundary between the transfer of a global position in an abstract universality and the disposal of a concrete asset of the inheritance. Given the AT's known resistance—having already issued guidance to specifically tax the sale of such concrete assets—and the recent TCAS position, it is highly possible that this story will have new chapters, leaving room for future litigation regarding the exact qualification of real estate alienations prior to partition.

Assuming the deliberate nature of this recent STA case law, it unequivocally suggests that any capital gains obtained through the sale of assets belonging to undivided inheritances are not subject to IRS. Naturally, given the persistent reluctance of the Tax Authority to broadly embrace this position (now with the backing of the TCAS), following this path may still require some taxpayers to resort to litigation to assert their rights.