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 EUR.
- 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 sqm.
Tax exemptions for business assets
With regard to the tax exemption for business assets, a distinction must be made between assets that are generally eligible for tax relief and assets that are actually eligible for tax relief.
Assets eligible for tax relief include:
- Domestic agricultural and forestry assets and assets located in the EU or the EEA.
- Domestic business assets or business assets serving a permanent establishment in an EU or EEA member state
- Participations in domestic partnerships or in partnerships with permanent establishments in EU or EEA Member States
- Shares in corporations with their registered office or management in Germany, a Member State of the EU or the EEA and a minimum shareholding of more than 25 percent.
The beneficiary assets are then derived from the assets eligible for tax relief on the basis of a large number of calculation steps. In a simplified summary, it can be stated here that so-called administrative assets are excluded from tax relief and are deducted from the assets eligible for relief in order to determine the assets eligible for relief.
Administrative assets are precisely defined by law. The definition is made with regard to the property serving the actual business. Of the assets eligible for preferential tax treatment, 85 percent are tax-exempt (= so-called “Verschonungsabschlag”).
However, a prerequisite for the granting of the exemption discount is compliance with the so-called payroll deadline. The tax exemption is only to be granted if the business is continued with its employees. According to the regulation, within 5 years after the acquisition, the wage total may not fall below 400 percent of the initial wage total. The initial wage bill is the average wage bill of the last 5 financial years ending before the date on which the tax arises. However, the regulation does not apply if the initial wage bill is EUR 0.00 or the enterprise has no more than 5 employees.
If there are more than 5 but not more than 10 employees, a minimum wage bill of 250 percent replaces 400 percent. If there are more than 10 but not more than 15 employees, the 400 percent minimum wage rate is replaced by a 300 percent minimum wage rate. If the minimum wage amount is not reached within the 5 years, the tax exemption lapses to the same percentage extent as the minimum wage amount was not reached.
In addition, the tax relief cannot be claimed or can only be claimed on a pro rata basis if the business or the shareholding is sold or abandoned within 5 years after the acquisition (so-called retention period). If the assets eligible for relief do not consist of more than 20 per cent administrative assets, a tax exemption of 100 percent can be claimed instead of the 85 percent tax exemption.
However, this results in the following tightening of the payroll and retention periods to be complied with:
- Retention period is 7 years instead of 5 years
- Wage sum deadline is 7 years instead of 5 years
- In the basic case, the minimum wage total is 700 percent instead of 400 percent.
- If there are more than 5 but not more than 10 employees, the minimum wage bill increases from 250 percent to 500 percent.
- If there are more than 10 but not more than 15 employees, the minimum wage bill increases from 300 percent to 565 percent.
In addition, the assets remaining after deduction of the tax-free allowance are only taxed if they exceed EUR 150,000.00.
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 EUR is deductible without having to provide proof.
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 EUR;
- For each child/stepchild: 400,000 EUR;
- For each child of a deceased child/stepchild: 400,000 EUR;
- For each child of a living child/stepchild: 200,000 EUR;
- For all other persons in tax class I: 100,000 EUR;
- For all persons in tax class II and III: 20,000 EUR.
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 EUR;
- Child up to 5 years: 52,000 EUR;
- Child aged 5 to 10 years: 41,000 EUR;
- Child aged 10 to 15 years: 30,700 EUR;
- Child aged 15 to 20 years: 20,500 EUR;
- Child aged 20 to 27 years: 10,300 EUR.
From their 27th birthday, inheriting children have no further exempt amount for their support.
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 step-children
- 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)
The following tax rates have been applicable to inheritance tax and gifting tax since January 1st 2010: