Inheritance tax (Erbschaftsteuer)
The inheritance tax is set up as a tax on a case of inheritance, so that it is connected to the actual passing of inheritance to each heir, legal inheritor, legatee or other recipient. Its connection point is not the deceased person’s entire legacy of assets as a whole – as in the estate tax system used by other countries – but rather only the assets received by the relevant heir after all estate obligations have been deducted.
Personal tax obligation
In cases of unlimited inheritance tax obligation, the tax is subject to the total existing assets in the country and out of it. In cases of limited inheritance tax obligation, only the assets verified within the country are taxed.
Unlimited inheritance tax obligation arises when the bequeather or recipient is a resident at the time of death (or gifting). All those having their regular habitation or usual location within the country shall be considered residents. In the case of German citizens, unlimited inheritance tax obligation extends itself by up to five years after their moving to another country, as well as for companies or corporations who have their management or location within the country. Limited inheritance tax obligation applies when the inheritance and the bequeather live in another country, but assets verified as being within the country are being inherited.
The following items, among others, remain exempted from tax:
- Household goods including linens and clothing in the case of receipt by persons of tax class I, as long as the value does not exceed 41,000 Euro.
- Land ownership or part thereof, objects of art, art collections, scientific collections, libraries and archives at 60 percent of their value, if the preservation of these items is in the public interest due to their significance for art, history or science, if the annual costs generally exceed the gained income, and if the objects are or are made available for research purposes or public education, to a reasonable extent.
- Land ownership or partial land ownership, which is made accessible without legal obligation for the use of the general public or a public charity, and whose preservation is in the public interest, if the annual costs generally exceed the gained income.
- Financial contributions among living persons for the purpose of appropriate support or for education of the intended heir.
- Normal occasional gifts.
- Financial contributions dedicated exclusively to churches, non-profits or charity purposes, if their use is ensured to meet the specified purpose.
- Financial contributions to political parties according to § 2 of the Party Law.
Tax exemption for self-used residential premises
In the case of inheritance or gifting of self-used residential premises located in Germany, a member state of the EU or a state belonging to the European Economic Area, under some circumstances this transfer can be completely exempted from tax.
Allocation of built-up land among living persons (gifting) to the spouse or partner are always tax free if there is an apartment in the building for the owner’s use (as a family home) or with the gifting the other is released from entered obligations in connection with the purchase or construction of the family home.
In the case of the inheritance of a family home in which the bequeather has his own dwelling used for residential purposes up until his death, or if he was prevented by urgent reasons from using it himself, but which is intended for immediate use by the receiving spouse or partner for their own residential purposes (as a family home), the receipt shall remain tax free with the further condition that the recipient maintains this self-use for at least ten years.
Children – or grandchildren, if the children die first – are released from inheritance tax under the same conditions as spouses or partners in terms of a built-up piece of land that they inherit, if they begin to use it themselves immediately and with the additional condition that the floor area of the apartment must not exceed 200 m².
Tax exemptions for business assets
According to the stipulations of §§ 13a and 13b in the German Inheritance Tax Law [ErbStG], 85 percent of the value of business assets, assets of agricultural and forestry businesses and certain portions of corporations are exempt from inheritance tax. This is called the relief deduction (Verschonungsabschlag).
The main purpose of this exemption is the continuation of the business with regard to its employees. Therefore, this exemption has a condition for businesses employing 20 or more persons: in a period of five years, the total salary sum must not be lower than four times the outgoing salary sum. The outgoing salary sum is the average annual salary sum of the business in the last five years before inheritance. The exemption is not applicable if the business is sold within the five-year retention period, and in case of partial sale, the exemption applies only partially.
The recipient may opt for a seven-year retention period instead of five, and must in this period attain seven times the outgoing salary sum instead of four times. By extending to seven years, the recipient gains a relief dediction that applies to 100 percent of the received business assets instead of 85 percent (making it completely free of inheritance tax).
Inland business assets and the relevant business assets of a business location within the EU or in a state of the European Economic Area are benefited. The benefited business assets must not consist of more than 50 percent, or in case of the seven-year retention period option not more than 10 percent, of administrative assets, whereby the law defines this concept precisely with regard to the characteristic of serving the actual business.
In the usual case of the five-year retention period, 15 percent of the business assets are subject to inheritance tax. But if this value is not over 150,000 Euro, it shall also remain untaxed (deducted amount). This regulation ensures that the deduction amount only benefits smaller businesses.
The following are deductible:
- Debts left by the bequeather;
- Obligations from bequests, conditions and applicable legal portions
- Costs for the burial of the bequeather, an appropriate grave headstone, the usual grave maintenance with its capital value for an undetermined length of time, and the costs arising for the recipient as a direct result of handling and distributing the estate. For these costs, a total amount of 10,300 Euro is deductible without having to provide proof.
Depending on the relationship of the heir (recipient) to the bequeather (gifter), there are three different tax classes (§ 15 ErbStG):
Tax class I:
- Spouse, partner
- Children and stepchildren
- Descendants of these children and stepchildren
- Parents and ancestors (grandparents, great-grandparents etc.) in case of receipt due to death (inheritance, gifting due to death– § 2301 BGB – German Civil Code)
Tax class II:
- Parents and ancestors (if not included in tax class I)
- Siblings, descendants of siblings to the first degree,
- Sons and daughters in law, step-parents and parents-in-law
- Divorced spouses and also partners from a terminated partnership
Tax class III:
- All other persons (such as partners, friends)
Every recipient with unlimited tax liability is entitled to a personal exempt amount, which applies both to receipt due to death and also to gifts among living persons. The exempt amounts are:
- For the spouse/partner: 500,000 Euro;
- For each child/stepchild: 400,000 Euro;
- For each child of a deceased child/stepchild: 400,000 Euro;
- For each child of a living child/stepchild: 200,000 Euro;
- For all other persons in tax class I: 100,000 Euro;
- For all persons in tax class II and III: 20,000 Euro.
Additionally, in case of inheritance, the surviving spouse or partner and the children are assigned a special exempt amount for their support. The exempt amounts are:
Spouse/partner: 256,000 Euro;
- Child up to 5 years: 52,000 Euro;
- Child aged 5 to 10 years: 41,000 Euro;
- Child aged 10 to 15 years: 30,700 Euro;
- Child aged 15 to 20 years: 20,500 Euro;
- Child aged 20 to 27 years: 10,300 Euro.
From their 27th birthday, inheriting children have no further exempt amount for their support.
The following tax rates have been applicable to inheritance tax and gifting tax since 1 January 2010: