Inheritance Tax in Germany

English speaking tax consultance for German inheritance tax law

Any acquisition due to death is generally subject to inheritance tax in Germany. The different tax classes, allowances, benefits and valuation approaches in German tax law offer enormous tax saving potential. In Germany, arrangements to reduce inheritance tax are possible before the inheritance and immediately afterwards, as well as during the inheritance tax return.

You can find detailed information on German gift tax for donations among living persons here: Gift tax in Germany

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German inheritance tax advice from English speaking lawyers and tax advisors

Advice in the area of German inheritance tax is provided by specialized tax advisors and attorneys specializing in German tax law. The focal points of consulting are:

1. Tax-optimized estate planning, in particular through wills and lifetime gifts
2. Development of a long-term succession of assets within the family with the aim of avoiding German inheritance tax
3. Measures to reduce German inheritance tax after the occurrence of the inheritance
4. Preparation of inheritance tax returns in Germany
5. Representation vis-à-vis the German tax authorities, in particular in the event of objections and legal action against the inheritance tax assessment
6. Inheritance tax valuation of real estate
7. Inheritance tax valuation of companies
8. Advice on how to take advantage of the allowances for German inheritance tax

The questions of its tax treatment are as complex as the inheritance itself. For this reason, our english speaking German tax lawyers work together with lawyers for inheritance law, company law, family law and real estate law, depending on the case.

Transactions subject to German inheritance tax

In particular, the following assets are subject to inheritance tax in Germany:

1. Inheritances
2. Legacies
3. Payments on asserted claims for compulsory portions
4. Acquisition through donations on death

In addition, there are a large number of other incidents subject to German inheritance tax, which are not always immediately apparent as such. An overview is provided here in § 3 of the German Inheritance and Gift Tax Act (ErbStG).

Tax rates and allowances for inheritance tax in Germany

The tax burden in the case of German inheritance tax depends very much on the personal relationship between the donor and the presentee. Below is an overview for important groups of people:

1. Spouses and registered partners: Tax class I, tax rate: 7-30 percent, tax-free amount: 500,000 euros, pension-free amount: 256,000 euros
2. Children and stepchildren: Tax class I, tax rate: 7-30 percent, tax-free allowance: 400,000 euros, pension allowance: up to 52,000 euros (depending on age)
3. Grandchildren: tax class I, tax rate: 7-30 percent, tax-free amount: 200,000 euros
4. Parents: Tax class I, tax rate: 7-30 percent, tax-free amount: 100,000 euros
5. Siblings, nephews, nieces: Tax class II, tax rate: 15-43 percent, tax allowance: 20,000 euros
6. Children-in-law: tax class II, tax rate: allowance: 20,000 Euro
7. Life partners, friends, business partners etc.: Tax class III, tax rate: 30-50 percent, tax allowance: 20,000 Euro

Special tax features for real estate in Germany

In Germany, real estate such as houses and apartments usually belong to the essential valuable components of an estate. For real estate, there are some special features regarding German inheritance tax.

Therefore, when planning the succession of property and submitting the inheritance tax return in Germany, the benefits of real estate should be taken into account. These include, above all, the tax exemption for residential property further used by the heir (§ 13 para. 1 no. 4b and 4c ErbStG) and the 10 percent valuation discount for rented residential property (§ 13c para. 1 ErbStG). It is particularly important to make use of the tax options when valuing the properties in Germany.

Beneficiary business assets in Germany

If a company or shares in a company are transferred in Germany by way of inheritance, the special concessions for business assets apply according to German tax law. The current regulation in the German inheritance tax law is the result of a political compromise based on the specifications of the German Federal Constitutional Court.

These complex regulations continue to offer extensive exemption of corporate succession from German inheritance tax for many companies. However, it is necessary to know the conditions of the benefits and, if necessary, to create the conditions for tax exemption.

Especially in the case of the dissolution of a community of heirs, the possible income tax consequences must also be taken into account. This can be the case, for example, in the case of a company spin-off.

Notification of the inheritance, submission of the German inheritance tax return

Inheritances, legacies, compulsory portion payments etc. must be reported to the German tax office within three months to the Gift Tax Office (§ 30 ErbStG). Since the layman is usually neither aware of the obligation to notify nor the corresponding deadline, such notifications are in practice rather the exception. The German tax offices will of course still learn about the inheritance. After all, they receive inheritance tax notifications from the banks and insurance companies in Germany holding the account, as well as notifications from the probate courts or notaries.

In Germany, the tax office of the deceased's place of residence will then regularly contact the known parties involved with the request to submit an inheritance tax return. If an attorney for German tax law is appointed, an extension of the deadline for submitting the inheritance tax return is usually generously granted. He checks the tax optimization possibilities, for example, for married couples the specialist for inheritance tax returns checks whether the specifically calculated gain compensation can prevent or reduce inheritance tax in Germany.

Berlin Testament in case of inheritance in Germany

The Berlin Testament is probably the most frequently created will in Germany. In the Berlin Testament, the spouses appoint each other as sole heirs and their children as final heirs.

The Berlin testament is fiscally disadvantageous with regard to the utilization of the tax-free amounts and the so-called tax progression. Therefore, even before the inheritance in Germany is made, a more favourable form of the will should be considered - for example, through additional bequests in the first case of inheritance.

After the inheritance: immediate measures for tax reduction

Only a few inheritance cases were optimally designed in advance with regard to German inheritance tax. In order to avoid a too high tax burden in Germany, the possible must then be brought out in the inheritance tax return. In some constellations, however, it is still possible to legally intervene in the distribution of the estate in such a way that a very significant positive tax effect is achieved.

• One option is the disclaimer of the heir within 6 weeks. In this way, the estate can be distributed to other persons who are, for example, in a more favourable tax class and, if necessary, several allowances can be used. If a compensation is paid in return for the disqualification, which is considered an obligation of the estate, there are other options.
• Another possibility is the assertion of claims for a compulsory portion. This is especially true in cases of the Berlin will, in which the spouses initially appoint each other as sole heirs (see above). Here it should be examined whether the children can use their personal inheritance tax allowances by (amicably) claiming their compulsory portion.
• In the case of spouses in the matrimonial property regime of the community of gain, the sole heir can in some cases also provide for an improvement in German inheritance tax by refusing and at the same time claiming the equalization of gain and the so-called small compulsory portion.

Tax evasion with the German inheritance tax

As with other types of tax, missing or incorrect information quickly leads to the criminal offence of tax evasion in Germany. No risks should be taken here and all necessary information should be given to the lawyer in charge of the inheritance or the inheritance tax return. From the point of view of German criminal tax law, the instrument of self-denunciation as well as the criminal and tax law statutes of limitations for inheritance tax evasion are of practical relevance in Germany.

Non-tax aspects of wills in Germany

Even if dealing with one's own death is not always easy, without a will no family and no entrepreneur should be in Germany. Especially when real estate, businesses are inherited, should not be left to chance or legal succession.

In Germany, if the heirs are minors, if necessary a supplementary guardian is appointed by the court and he then makes the decisions for the child. If the family home can no longer be financed after death and a sale has to take place, for example, the complementary caregiver will demand that the proportionate purchase price be transferred to a separate children's account.