Inheritance in Germany: allowances for less inheritance tax
Usually, anyone who experiences a death in the family also deals with inheritance.
In Germany, inheritance is subject to tax. However, there are allowances that vary depending on the degree of relatedness and the amount of the inheritance. These allowances make it possible to pay less levy.
This article explains the various allowances, tax rates for inheritance and further information on inheritance tax.
Inheritance in Germany: Tax allowances for reduced inheritance tax
Inheritance: subdivision into tax classes (I-III)
How much of the inheritance is actually tax-free depends, among other things, on the degree of kinship.
The higher or more direct this is, the greater the personal tax-free amount.
§Section 15, 16 Inheritance Tax and Gift Tax Act (ErbStG) divides the relationships into three tax classes. However, these are independent of the tax classes for income tax.
Tax class I
This includes all relatives in the direct line:
Spouses/registered civil partnerships, children and stepchildren as well as grandchildren and great-grandchildren. However, the tax-free amounts also differ in the individual classes.
– Spouses and civil partners: 500,000 euros
– Children, stepchildren and orphaned grandchildren: 400,000 euros
– Grandchildren: 200,000 euros
– Great-grandchildren: 100,000 euros
Tax class II
– Siblings, nieces, nephews: 20,000 euros
– Step-parents, children-in-law/parents-in-law: 20,000 euros
– Divorced spouses: 20,000 euros
Tax class III
– All other heirs: 20,000 euros
If the inheritance is more than the tax-free amount, the government only taxes the part that is above this amount.
Example: Max Mustermann inherits 800,000 euros as a spouse from his deceased wife.
The tax-free amount in this case is 500,000 euros, so he has to pay duties on the 300,000 euros above this amount.
Lump sums as additional allowances
In addition to the allowances in the respective tax classes, there are further regulations that provide for tax exemption.
Special pension allowance: §17 ErbStG
Spouses, civil partners, children, stepchildren and grandchildren without a pension can apply for their own allowances.
Spouses/registered partnership: 256,000 euros
Children up to 5: 52,000 euros
Children between 6-10: 41,000 euros
Children between 11-15: 30,700 euros
Children between 16-20: 20,500 euros
Children between 21-27: 10,300 euros
If you receive a widow’s, widower’s or orphan’s pension, we deduct the amount from the pension contribution. The difference then defines the actual tax-free amount.
Example: Max Mustermann applies as a widower for 256,000 euros as a pension contribution in accordance with §17 ErbstG. Once he has calculated how much widower’s pension he will receive, he can deduct this amount from the EUR 256,000.
The resulting amount, e.g. 150,000 euros, is then legally tax-free.
Good to know:
The German Inheritance Tax and Gift Tax Act changed on June 25, 2017. The purpose of the change was to comply with European laws on combating tax avoidance.
This includes the rules for limited or unlimited tax liability and the tax-free amount for pensions.
With the amendment to Section 17 ErbStG, the surviving spouse or partner or the deceased’s child is also granted the special pension allowance in cases of limited tax liability. This law means that if you get an allowance under Section 16 ErbStG, you can also use Section 17 ErbStG.
The special pension allowance is reduced by foreign pension payments for spouses and children, similar to domestic pension payments.
Care contribution: §13 para. 1 no. 9 ErbStG
Spouses or children who have taken care of the deceased person without receiving payment can receive EUR 20,000. Section 13 (1) No. 9 of the ErbStG states this.
Note here that it is important to well document the support.
Inheritance liabilities: §10 ErbStG
The death of a loved one usually causes further costs for the surviving dependants.
Estate liabilities according to §10 ErbStG are financial obligations that arise in connection with the death of a person. When calculating inheritance tax, you can deduct the following examples of estate liabilities.
- Funeral expenses may qualify as estate liabilities. They include burial, coffin, burial site, funeral service and other expenses:
- You can take into account the costs for probate and certificate of inheritance.
- Anyone who makes funeral arrangements and concludes a contract before their death can deduct the costs.
- Debts of the deceased associated with the inheritance (including tax debts) at the time of death.
You can get up to 10,300 euros for funeral expenses, headstone, grave care, will opening, and inheritance certificate. Even without proof!
Further tax exemptions §13 ErbStG
For heirs in tax class I, 41,000 euros are exempt from inheritance tax. This also includes books, furniture, electrical appliances and clothing.
Cars are also tax-free up to 12,000 euros.
Heirs in tax classes II and III can apply for a maximum total tax exemption of up to 12,000 euros.
Surviving partners and spouses can remain in the apartment or house tax-free. They must live there for at least another 10 years. However, if they are unable to do so, e.g. for health reasons, they are exempt from this obligation.
A child or orphaned grandchild has the same rights as a partner, but only limited to 200 square meters. These heirs must then also live there for a further 10 years.
Inheritance tax rates
As we have already discovered, the relevant amount is the amount we calculate minus the allowances.
You can use this amount to look up the tax table. There you can find out what percentage you have to pay on the remaining inheritance.
Value of inheritance
Max Mustermann’s deceased wife leaves him inheritance assets of 980,000 euros.
Max cannot get a widower’s pension, but intends to obtain an extra 10,300 euros for inheritance debts.
He is a close family member and falls into tax class I. Therefore, Max can receive 500,000 euros (spousal allowance in tax class I). Additionally, he can receive 256,000 euros (tax-free pension contribution for spouses without a widower’s pension). On top of this, there is an additional 10,300 euros for estate liabilities.
In total, Max receives an allowance of 766,300 euros.
If he deducts this amount from the inheritance, which is 980,000 euros, there is a difference of 213,700 euros.
We must tax these 213,700 euros. Max can use the table to determine the percentage of the amount that will be taxed.
In this case, the tax rate is 11%. The total inheritance of 980,000 euros deducts an inheritance tax of 23,507 euros.
Max Mustermann inherits a total of 956,493 euros.
In Germany, heirs can lower their taxes by using allowances and getting help from a tax advisor. The different tax categories, fixed amounts for retirement and healthcare contributions, and other tax breaks allow for improvement. An individual approach, taking into account the applicable laws, can lead to an efficient inheritance tax structure.
The s&w team can help you use allowances and plan inheritance tax cases effectively. Getting tax advice before receiving an inheritance is best. Before receiving an inheritance, it is advisable to seek tax advice. If needed, give a gift or do other things to reduce the inheritance tax while you are alive.
You can optimize inheritance tax planning by transferring assets to the spouse during his or her lifetime. This strategy makes it possible to use allowances more effectively and minimize the tax burden for inheriting children. Good planning and advice are important to take advantage of benefits and avoid risks.
Refer to our blog article for more information on inheritance and gift tax in Germany.
Source: Haufe, Finanztipp, BMJ
Photos: Romain Dancre (Unsplash), Dominik Lange (Unsplash)
Disclaimer: We assume no liability for the accuracy and completeness of the information. The information provided here does not constitute recommendations for action.
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