Tax Advice on Inheritance Tax and Gift Tax

1. Basics of inheritance tax and gift tax advice

Inheritance tax (Erbschaftsteuer) and gift tax (Schenkungsteuer) essentially follow the same logic. An acquisition is valued; then it is examined which personal tax-free allowances (Freibeträge) apply, which tax class (Steuerklasse) is relevant and which tax rate results from this. After that, special rules are considered, for example for the family home or reliefs for business assets. A tax advisor (Steuerberater) specialising in inheritance tax and gift tax knows these interrelationships and can use them optimally for you.

The personal allowances are set out in Section 16 of the German Inheritance and Gift Tax Act (ErbStG). The tax rates are set out in Section 19 ErbStG. For gifts and multiple transfers within a certain period, Section 14 ErbStG is central, because it governs the aggregation of acquisitions.

Tax classes: why kinship makes the biggest difference

The tax class depends on the relationship between the deceased or donor and the recipient. Tax class I is usually the most favourable, tax class II lies in between, and tax class III is the most expensive. This is why an identical estate can have completely different tax consequences depending on the family constellation.

Tax rates: how to read the progression

The tax rates rise with the taxable acquisition. This is a progressive scale. In tax class I it starts low and can rise to 30 per cent. In tax classes II and III the rates are higher and go up to 50 per cent.

2. Tax-free allowances at a glance and the 10-year rule

The most important allowances

The allowances differ according to kinship. Typical amounts are: €500,000 for a spouse or civil partner, €400,000 per child, €200,000 per grandchild, €100,000 for certain other persons in tax class I and €20,000 for many other recipients. For married couples in particular, a common way of drafting wills can unintentionally waste these allowances — the reasons are explained under Berliner Testament (joint will of spouses): the underestimated inheritance tax trap (in German).

10-year rule: why gifts need to be planned

Gifts are often the most important instrument for making optimal use of allowances. The legislator aggregates multiple acquisitions from the same person within ten years. This is set out in Section 14 ErbStG. This makes it possible to use allowances several times at sensible intervals, if you start early and document everything properly. How this works out over several decades is shown in our article Making optimal use of tax-free allowances (in German).

At the same time, the rule is also a trap: if you receive several gifts at short intervals, you may later be surprised because part of them suddenly becomes taxable, even though each individual gift was below the allowance when considered on its own.

Gift tax versus inheritance tax

Whether a gift or an inheritance makes more sense from a tax perspective depends on the objective. Gifts allow planning over time, use of the ten-year logic and often better documentation too. Inheritances, on the other hand, are often unplanned and happen under time pressure. A practical solution is often a staggered transfer: part is transferred early, and part is retained as a safeguard.

3. Valuation: what counts as value and where things often go wrong

The tax burden stands or falls with the valuation. Cash and securities accounts are usually clear-cut. With real estate, shareholdings, company shares, loans within the family or foreign assets, it becomes considerably more demanding. In practice, there are very frequently disputes about the value applied – this is where an experienced inheritance tax advisor can make the difference.

Liabilities of the estate and deductions

In addition to valuation, the question of which debts and costs can be deducted is relevant. Typical items are loans, unpaid invoices, funeral costs, costs of settling the estate and other obligations that economically belong to the estate.

Typical valuation areas

• Real estate: modernisations, use, rental agreements, rights such as usufruct (Nießbrauch) or right of residence (Wohnrecht)
• Shareholdings: articles of association, compensation clauses, reference dates, special rights
• Loans: written agreements, interest, repayment, evidence
• Insurance policies: beneficiary designation, time of payment, contract details
• Household effects and movable items: possible tax exemptions
• Crypto assets: price on the reference date, proof of ownership, access to the wallet — see Cryptocurrencies in the estate (in German) and Inheritance and gifts of cryptocurrencies (in German)

4. Real estate and tax advice: family home, letting, planning

Why real estate is often the largest source of tax

For many families, real estate is their largest asset. At the same time, it is difficult to divide, and liquidity for tax payments is not automatically available. Without planning, it can happen that the property has to be sold just to pay the tax.

Family home: possible tax exemption

The law contains a tax exemption for certain family homes. If a family home passes to a spouse or civil partner and certain conditions are met, the acquisition can be tax-free. There is also a tax exemption for children, typically with a limit on living space.

Gift with usufruct or right of residence

A common structure is anticipated succession (vorweggenommene Erbfolge), in which ownership is transferred but the donor retains economic rights, for example usufruct or a right of residence. This can make sense from a tax perspective, because it can reduce the value of the assets transferred. This is explained in detail with a worked example under Usufruct and anticipated succession (in German); the conditions for the exemption for the owner-occupied property are set out under Inheriting the family home tax-free (in German).

Güterstandsschaukel and equalisation of accrued gains

In certain cases, the matrimonial property regime and an equalisation of accrued gains (Zugewinnausgleich) can also play a role. Such structures are legally sensitive and must suit the individual case.

5. Business succession and business assets

The transfer of business assets or of a company is a separate area of inheritance tax and gift tax advice. There are statutory reliefs designed to make it easier for companies to continue. However, these reliefs are tied to conditions, for example retention periods, certain payroll totals (Lohnsummen) and further criteria.

In practice this means: you not only have to declare the acquisition, but also ensure that the conditions are complied with later on. Otherwise retrospective taxation (Nachversteuerung) threatens. Which reliefs exist and why they fail in practice is explained under Business succession and inheritance tax (in German).

What is often examined in practice

• Who receives which shares and which voting rights
• How the management of the company is secured
• Which withdrawals and distributions are planned
• How retention periods and conditions are complied with

6. Deadlines, notification, tax return and limitation period

Notification obligation after an inheritance

Under Section 30 ErbStG, an acquisition subject to tax must generally be notified to the tax office (Finanzamt), within a period of three months after becoming aware of the acquisition. The notification is not the same as the tax return, but it is often the starting point. What happens if it is not made, and why the density of checks is increasing, is explained under Reporting obligation for inheritances and gifts (in German).

Notification is not the same as a tax return

Many people confuse the notification with the tax return. The notification is a report that an acquisition has taken place. The tax return is the detailed preparation with values, deductions, evidence and possibly special rules. Depending on the case, the tax office requests a return or asks follow-up questions.

Why early structuring often makes sense

If you structure things early, you reduce the likelihood of estimates and errors. What matters is not only speed but quality: values, reference dates, contracts and evidence must be consistent.

7. International aspects: residence, assets abroad

International cases are often complex, even if they look simple at first glance. The international connection can arise from the residence of one of the parties involved or from assets abroad, for example real estate, shareholdings or accounts.

Depending on the constellation, German rules, foreign rules and treaties can interact. In practice, a clear overview is then needed: where which assets are located, who is resident where, which deadlines apply and how values are evidenced.

8. Objection, legal action and disputed values

Not every tax assessment is automatically correct. Disputes arise particularly often over the value of real estate, the classification of certain assets or the recognition of deductions. If, in your view, a valuation is not right or documents have not been taken into account, an objection (Einspruch) can make sense.

In practice, it pays to check early on whether the assessment is logical: reference dates, values, allowances, deductions and tax class must be consistent.

9. How working with your tax advisor works

Step 1: Gain an overview and clarify the objective

In the first step, we clarify whether this is about advance planning or about settling a specific inheritance or gift. Then we define the objective, for example making optimal use of allowances, transferring real estate cleanly from a tax perspective, or preparing a business succession.

Step 2: Take an inventory of the assets

Together we draw up an overview of the assets: real estate, securities accounts, bank accounts, shareholdings, insurance policies, loans, foreign assets, special contracts. This quickly shows where the major value drivers lie.

Step 3: Valuation and strategy

Next comes the valuation and a strategy that is legally sound and practically feasible. For gifts, we factor in the ten-year logic; for inheritances, we structure the return and the supporting evidence.

Step 4: Implementation and tax return

Where needed, we coordinate the implementation, for example with a notary or other parties involved, and prepare the inheritance tax or gift tax return, including traceable documentation.

10. Checklist: documents you can prepare

General

• Family relationship and parties involved, including basic data
• Will or contract of inheritance (Erbvertrag), if available, plus certificate of inheritance (Erbschein) if already applied for
• List of all assets as at the reference date
• Evidence of debts and liabilities
• Overview of gifts made in the last ten years, if known

Real estate

• Land register extract (Grundbuchauszug), purchase agreement, loans, modernisations, rental agreements
• Living space, use, owner-occupation or letting, and relevant reference dates

Securities accounts, bank accounts, insurance

• Securities account and bank statements as at the reference date
• Insurance documents, in particular beneficiary designations and payment dates

Shareholdings and companies

• Articles of association, list of shareholders, annual financial statements, compensation clauses
• Overview of important framework conditions, if tax reliefs are relevant