Inheritance and gift tax can create substantial burdens on larger estates. Through forward-looking planning and the use of statutory planning opportunities, the tax burden can be reduced.
Fundamentals of Inheritance and Gift Tax
The Erbschaftsteuer- und Schenkungsteuergesetz (ErbStG) taxes both acquisitions upon death (inheritance, legacy, compulsory portion) and gifts inter vivos. Both types of transfer are subject to the same allowances and tax rates.
Personal Allowances
Personal allowances depend on the family relationship between the deceased/donor and the beneficiary:
| Beneficiary | Allowance | Tax Class |
|---|---|---|
| Spouse/registered civil partner | 500,000 euros | I |
| Children and stepchildren | 400,000 euros | I |
| Grandchildren | 200,000 euros | I |
| Parents and grandparents (on inheritance) | 100,000 euros | I |
| Siblings, nieces, nephews | 20,000 euros | II |
| Unrelated persons | 20,000 euros | III |
In addition, the surviving spouse is entitled to a special maintenance allowance of 256,000 euros. Age-dependent maintenance allowances are available for children (up to 52,000 euros).
Tax Rates
Tax rates are graduated according to tax class and the value of the taxable acquisition:
- Tax Class I: 7 per cent (up to 75,000 euros) to 30 per cent (over 26,000,000 euros)
- Tax Class II: 15 per cent to 43 per cent
- Tax Class III: 30 per cent to 50 per cent
Planning Opportunities
1. Multiple Use of Allowances Through Lifetime Gifts
Personal allowances renew every ten years (§ 14 ErbStG). Through repeated gifts, assets can be transferred tax-free over longer periods.
Example: A father can gift his child 400,000 euros tax-free every ten years. Over 30 years, 1,200,000 euros can thus be transferred without incurring gift tax. The allowances on inheritance remain unaffected, provided more than ten years elapse between the last gift and death.
2. Involving Multiple Persons
By involving both parents and grandparents, the allowances can be multiplied. From both parents combined, a child can receive 800,000 euros tax-free.
3. Chain Gifts
With chain gifts, assets are passed on through several persons to utilise additional allowances. The prerequisite is that each intermediate acquirer can genuinely dispose of the assets freely. A mere pass-through may be treated as an abuse of law by the tax authorities.
4. Tax Exemption for the Family Home
The acquisition of the owner-occupied family home by the spouse is fully tax-exempt (§ 13 Abs. 1 Nr. 4a ErbStG for inheritance, § 13 Abs. 1 Nr. 4a ErbStG for gifts). For inheritance by children, the exemption is limited to a living area of 200 square metres, and the child must occupy the property for at least ten years.
5. Reliefs for Business Assets
Business assets can, under certain conditions, be exempted at 85 per cent (standard relief) or 100 per cent (optional relief) from inheritance and gift tax. The requirements are set out in §§ 13a, 13b ErbStG and include, in particular, retention periods and payroll sum requirements.
6. Change of Matrimonial Property Regime (Güterstandsschaukel)
Switching from the statutory matrimonial property regime of community of accrued gains to separation of property and back can offer tax advantages. The accrued gains equalisation upon termination of the community of accrued gains is exempt from inheritance and gift tax (§ 5 ErbStG). Through a change of matrimonial property regime, assets can be shifted between spouses tax-free.
7. Usufruct Reservation
In a gift with usufruct reservation, the donor transfers ownership but retains the right to the income (e.g. rental income). The usufruct reduces the taxable value of the gift and thereby the tax burden. At the same time, it secures the donor's financial provision.
8. Foundation Solutions
Establishing a charitable foundation enables the tax-free transfer of assets (§ 13 Abs. 1 Nr. 16b ErbStG). Additionally, the special expense deduction for endowments can be utilised.
Valuation of Assets
Tax valuation follows the Bewertungsgesetz (BewG):
- Real estate: Valuation using the comparative value, capitalised earnings value or asset value method
- Business assets: Valuation using the simplified capitalised earnings method or individual valuation methods
- Securities: Market price or share value
The valuation can have a substantial impact on the tax burden. An appropriate valuation -- particularly for real estate and businesses -- is therefore of great importance.
Notification and Declaration Obligations
Acquisitions upon death and gifts must be reported to the tax office within three months (§ 30 ErbStG). The tax office will then, where applicable, request submission of an inheritance or gift tax return.
Summary
Utilising the statutory planning opportunities requires long-term planning and the coordination of tax, inheritance and corporate law aspects. Early advice from a tax adviser and lawyer is recommended.
