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Inheritance tax

After the death of a close relative, spouse or friend the heirs are often emotionally overwhelmed. In addition to coping with grief, the administrative tasks also lead to a considerable burden.

It is understandable that heirs, those entitled to a compulsory portion or legatees do not think about the tax consequences right from the start and the statutory three-month notification period for the report to the tax office has often already elapsed before tax advice could be obtained. The three-month period begins after the taxpayer has been notified of the inheritance, as the tax authorities believe that the taxpayer can be expected to act after this period. This obligation to notify can only be waived in special cases.

Submission of an inheritance tax declaration

After receipt of the notification of acquisition, the competent inheritance tax office requests the submission of the inheritance tax declaration, if the levying of inheritance tax is considered in the relevant case. If real estate, business assets or shares in corporations were inherited, the request to submit an inheritance tax return is to mandatory. 

Allowances and gifts

Inheritance tax is not levied by the inheritance tax authorities if, among other things, the value of the acquisition is lower than the exemption amounts provided for under inheritance tax law. The amount of the allowances depends on the relationship of the heir or legatee to the testator. For example, children are entitled to a tax-free amount of EUR 400,000.00, while parents are only entitled to a tax-free amount of EUR 100,000.00 in the event of acquisition by reason of death, and persons with whom there is a more distant relationship (e.g. siblings) are only entitled to a tax-free amount of EUR 20,000.00.

The following allowances apply in the case of inheritance:

Relationship of the parties - Exempt amount

Spouses / registered partners: EUR 500,000

Children / stepchildren / adopted children: 400,000 euros

Grandchildren / great-grandchildren: 200,000 euros

Parents / grandparents: 100.000 Euro

Siblings / nephews / nieces: 20.000 Euro

Children-in-law: 20.000 Euro

Life companions and unrelated heirs: 20,000 Euro

When calculating the tax-free amount available at the time of death, it should be noted that gifts received by the heirs or legatees from the testator within ten years prior to the death of the testator are to be offset against this tax-free amount and thus the tax-free amount available at the time of death of the testator may already have been "used up" by so-called preliminary gifts. If, for example, a father has given his daughter a sum of money amounting to EUR 100,000.00 one year before his death, the inheritance tax allowance still available to the daughter on the occasion of the acquisition on account of death amounts to only EUR 300,000.00. If the daughter inherits further financial assets amounting to EUR 400,000.00 on the occasion of death, EUR 100,000.00 must be subject to inheritance tax at the time of the father's death, as the inheritance tax allowance was no longer available in full.

Inheritance tax exemption or preferential treatment options

Under certain conditions, the acquirers can claim further inheritance and gift tax exemptions. In particular, there are considerable opportunities for tax exemptions available to companies in Germany. However, family homes or real estate rented out for residential purposes are also subject to inheritance tax under certain conditions, at least not at their full value.

In the case of spouses, it must also be taken into account that any existing claim to equalization of gains can considerably reduce the inheritance tax and that, in addition to the general inheritance tax allowance of EUR 500,000.00, a special pension allowance of up to EUR 256,000.00 is available to the spouse.

In order to retain the tax exemptions granted, the acquirers must in many cases meet certain requirements in the years following the inheritance or gift (e.g. comply with retention periods and wage totals), otherwise there is a risk of subsequent taxation.

In order to ensure that you are in good hands in terms of taxation in the event of an inheritance and that the tax exemption and tax concession options are exploited to the fullest possible extent, we will be happy to provide you with tax support in the event of an inheritance in addition to, or independently of, civil law issues.

This can be done, among other things, by submitting the above-mentioned inheritance notification.

Income tax problems after inheritance

However, it is also important to avoid undesirable tax consequences after the inheritance. Here, it is not only inheritance and gift tax that needs to be considered. Particularly in the distribution of the estate (especially in the settlement of communities of heirs), there may be unexpected and avoidable income tax burdens. This is because it is not only the frequently discussed inheritance tax that must be taken into account. The income tax consequences must also be taken into account, especially if real estate, business assets or shares in corporations are included in the estate (e.g. in the event of the dissolution or establishment of business splits, the removal of items from business assets, disputes between communities of heirs).

If, for example, one of the heirs receives a plot of land or a company from the estate and has to pay compensation to the other heirs in return, this may be a transaction for consideration of tax implications. The resulting taxable profit may then be taxable. If the heirs deviate from their inheritance quotas and from the testator's instructions when distributing the estate, they may also trigger further gift taxes. If a beneficiary of a compulsory portion receives, in particular, real estate, participations or business assets instead of the amount of money owed as a compulsory portion, this may constitute a sale that is relevant for income tax purposes. As a result, the heir has to pay tax on a legally assumed profit.

Tax law advice is therefore also required if a large estate is to be distributed or if the parties involved wish to deviate from the testamentary or statutory provisions. In this regard, we will be pleased to provide you with comprehensive advice on all inheritance, corporate and tax law issues.

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