Inheritance tax can be significantly reduced through the skilful use of allowances, valuation rules and lifetime gift chains. This article explains the key planning opportunities -- from business property relief under sections 13a/13b ErbStG to anticipated succession.
Inheritance Tax as a Planning Challenge
Inheritance tax represents a significant burden for many families and business owners. Germany -- unlike Sweden, Austria or Canada, for example -- continues to levy an inheritance and gift tax with rates of up to 50 per cent in tax class III. At the same time, the Inheritance Tax Act (ErbStG) offers numerous planning opportunities that enable substantial tax savings with foresight.
This article provides a comprehensive overview of the key instruments for inheritance tax optimisation -- from the use of personal allowances to the valuation of business assets and multi-stage transfer strategies.
Personal Allowances: The Foundation of Any Tax Plan
Allowances by Tax Class
The ErbStG grants varying personal allowances depending on the degree of kinship (section 16 ErbStG):
- Spouses and registered civil partners: 500,000 euros
- Children and stepchildren: 400,000 euros
- Grandchildren (where the parent has predeceased): 400,000 euros
- Grandchildren (where the parent is still alive): 200,000 euros
- Parents and grandparents (on death): 100,000 euros
- All other beneficiaries (tax classes II and III): 20,000 euros
Special Maintenance Allowance
In addition to the personal allowance, the surviving spouse is entitled to a special maintenance allowance of 256,000 euros (section 17 ErbStG). However, this is reduced by the capitalised value of any maintenance benefits received on account of the death (e.g. widow's pension). Children receive a maintenance allowance of between 10,300 and 52,000 euros, graduated by age.
Strategic Use: Lifetime Gift Chains
The personal allowances renew every ten years (section 14(1) ErbStG). This opens up one of the most powerful planning opportunities in inheritance tax law:
- Multi-stage transfers: Through regular gifts at ten-year intervals, substantial assets can be transferred tax-free. A married couple with two children can transfer a total of 4.8 million euros tax-free over 30 years (4 x 400,000 euros x 3 ten-year periods).
- Chain gifts: By involving multiple generations (parents, children, grandchildren) and using various transfer paths, the tax-free transfer capacity can be extended further.
- Timing strategies: Early estate planning is crucial, as each elapsed ten-year period enables a fresh utilisation of the allowances.
Business Property Relief: Sections 13a and 13b ErbStG
Overview of the Relief Schemes
The relief for business property is the centrepiece of inheritance tax optimisation for business owners. The law provides for two relief models:
Standard relief (85 per cent):
- 85 per cent of qualifying business property is exempt from tax.
- Retention period: The business must be continued for at least five years.
- Payroll condition: The aggregate payroll must not fall below 400 per cent of the initial payroll within five years (section 13a(3) ErbStG). Companies with up to five employees are exempt from this requirement.
- Administrative assets test: The proportion of administrative assets (non-operational assets such as financial resources, property let to third parties, securities) must not exceed 90 per cent.
Full relief option (100 per cent):
- 100 per cent of qualifying business property is exempt from tax.
- Stricter retention period: The business must be continued for at least seven years.
- Stricter payroll condition: The aggregate payroll must not fall below 700 per cent of the initial payroll within seven years.
- Administrative assets cap: The proportion of administrative assets must not exceed 20 per cent.
Qualifying Assets
Qualifying assets include in particular:
- Sole proprietorships and interests in partnerships
- Shares in corporations, provided the deceased or donor held a direct interest of more than 25 per cent (section 13b(1) no. 3 ErbStG)
- Agricultural and forestry assets
Administrative Assets: The Key Variable
The administrative assets test is the greatest practical challenge. Administrative assets include, among others:
- Real property let to third parties (with exceptions, e.g. in cases of operational split-ups)
- Interests in corporations of 25 per cent or less
- Financial resources (bank balances, receivables) to the extent they exceed a base amount of 15 per cent of the fair market value of the business assets
- Art objects and collections, precious metals, jewellery
Planning approach: Through timely restructuring of administrative assets -- for example reinvesting financial resources in operationally necessary assets or converting let property to operational use -- the proportion of administrative assets can be deliberately reduced.
Valuation: Minimising the Taxable Acquisition
Valuation Methods for Businesses
The valuation of the transferred assets determines the tax base for inheritance tax. In the business context, various methods come into consideration:
- Simplified capitalised earnings method (sections 199 ff. BewG): The standard statutory method. The capitalised earnings value is calculated from the sustainably achievable annual earnings multiplied by a statutory capitalisation factor (currently 13.75). This method tends to produce high valuations in low-interest-rate environments.
- Expert valuation: As an alternative, the taxpayer may demonstrate the lower fair market value through an expert opinion (section 198 BewG). In practice, IDW S1 opinions (discounted cash flow method) are common.
- Comparative method: For listed companies the stock market price; for unlisted companies comparable transactions.
Property Valuation
Special valuation rules apply to real property:
- Income approach: For let property based on rental income and a statutory multiplier.
- Cost approach: For owner-occupied or unlet property based on construction costs and land value.
- Comparative approach: For apartments and single-family houses based on comparable sale prices.
Practical tip: The tax valuation frequently deviates from the actual market value -- both upwards and downwards. An expert opinion is particularly worthwhile when the tax value is significantly above the actual market value.
Anticipated Succession: Giving Rather Than Bequeathing
Advantages of Lifetime Transfers
Anticipated succession -- the transfer of assets during the owner's lifetime -- offers considerable planning advantages over inheritance:
- Allowance utilisation: Through early transfers, personal allowances can be used multiple times.
- Value lock-in: The tax value is fixed at the time of the gift. For appreciating assets (e.g. company shares, property in growth regions), future appreciation is transferred tax-free.
- Planning flexibility: The donor can incorporate conditions and restrictions into the transfer, such as usufruct reservations, clawback rights or set-off provisions.
- Usufruct reservation: If the donor retains the usufruct over the transferred property, this significantly reduces the taxable value of the gift, as the usufruct is treated as consideration.
Planning Models
- Usufruct model: Transfer of property subject to a lifetime usufruct reservation. The usufruct reduces the taxable value by 20 to 60 per cent depending on the donor's age.
- Annuity arrangements: Agreeing recurring payments as consideration for the transfer can reduce the taxable acquisition.
- Family pool (family partnership): Contributing assets to an asset-managing partnership enables a step-by-step transfer of partnership interests and offers additional valuation advantages (discounts for restrictions on transferability).
Tax Benefits for the Family Home
Tax-Free Transfer of the Family Home
A frequently underestimated benefit concerns the tax-free transfer of the family home:
- Between spouses (during lifetime): The gift of the family home to a spouse is completely tax-free -- regardless of value (section 13(1) no. 4a ErbStG).
- On death (spouses): The inheritance of the family home by the surviving spouse is tax-free provided the beneficiary immediately uses the property as their own home and does not give up this use for ten years (section 13(1) no. 4b ErbStG).
- On death (children): The inheritance by children is tax-free provided the living space does not exceed 200 square metres and the same self-use requirement is met (section 13(1) no. 4c ErbStG).
International Aspects
Avoiding Double Taxation
Special problems may arise in cross-border inheritance cases:
- Unlimited tax liability: If the deceased or the beneficiary is resident in Germany, the entire worldwide estate is subject to German inheritance tax.
- Extended unlimited tax liability: German nationals remain subject to unlimited tax liability for five years after emigrating (section 2(1) no. 1(b) ErbStG).
- Double taxation treaties: Germany has inheritance tax double taxation treaties with only a few countries (including Denmark, France, Greece, Sweden, Switzerland, USA). In other cases, the unilateral credit method under section 21 ErbStG applies.
Conclusion: Planning Is the Key
Inheritance tax in Germany is a planning tax par excellence. Those who plan early can reduce the tax burden significantly -- in many cases to zero. The key levers are:
- Early start: The more ten-year periods that can be used for gifts, the greater the tax-free transfer capacity.
- Business property relief: The relief provisions of sections 13a and 13b ErbStG can exempt up to 100 per cent of business property from tax.
- Valuation optimisation: By choosing the right valuation method and, where appropriate, obtaining an expert opinion, the tax base can be reduced.
- Planning instruments: Usufruct reservations, family partnerships and conditions offer additional optimisation opportunities.
At compleneo, we provide comprehensive advice on the tax-efficient structuring of your estate succession. Our tax advisors and lawyers work together across disciplines to develop a tailored succession strategy that is both legally sound and tax-efficient.
