Inheritance & tax: deductible costs following a death

Inheritance tax becomes payable where the value of an estate exceeds the applicable tax-free allowance available to the beneficiary. However, there are ways for heirs to reduce their inheritance tax liability. For example, debts and estate liabilities reduce the taxable value of the estate. In addition, certain costs arising in connection with the death may also reduce the inheritance tax burden.

Debts and estate liabilities

Debts and estate liabilities form part of the deceased’s estate. Provided the estate is not over-indebted, these liabilities have a tax effect: they reduce the value of the estate and therefore – where inheritance tax is payable – indirectly reduce the tax burden.

Deductible costs following a death

In some cases, heirs may also deduct certain costs incurred after the death for inheritance tax purposes. The relevant provision is Section 10(5) of the German Inheritance and Gift Tax Act (ErbStG).

Lump sum for estate-related costs

As is common in tax law, there is a fixed lump sum that heirs can claim for costs connected with an inheritance – regardless of whether such costs were actually incurred.

In a 2023 decision, the German Federal Fiscal Court (BFH) confirmed that claiming this lump sum does not require proof that costs were actually incurred – not even in principle (BFH, 1 February 2023, II R 3/20).

For deaths occurring after 1 January 2025, the lump sum amounts to €15,000 per estate. For deaths before that date, it is €10,300.

Note: The lump sum also applies to prior and subsequent heirs, without the need to demonstrate actual costs. The lump sum is not available separately to each heir; it applies collectively to all co-heirs. Each co-heir may generally claim only a proportionate share. Disputes may arise where some co-heirs have already “used up” the lump sum by claiming actual, evidenced costs.

Actual deductible costs

If actual costs exceed the lump sum, they may be claimed instead, provided they meet the legal requirements and can be substantiated.

Funeral costs

Under Under Section 1968 of the German Civil Code (BGB), the heirs are responsible for funeral costs. These expenses can be deducted in the inheritance tax return.

However, only genuine funeral-related costs are included, such as:

• funeral director’s fees,
• coffin, cemetery fees, obituary notices,
• travel expenses for attending the funeral,
• funeral music,
• flowers and church services,
• transfer of the body,
• cremation or burial at sea,
• funeral ceremony (religious or secular).

Whether the costs are reasonable is generally not closely scrutinised.

Reasonable headstone and grave maintenance

The cost of a reasonable headstone is also deductible. But what is considered “reasonable”?

According to the BFH (judgment of 1 September 2021, II R 8/20), this depends on the social standing of the deceased, which is linked to the value of the estate:

“The decisive factor is what is regarded, according to the customs and practices of the deceased’s social circle, as appropriate for a dignified burial.”

Note: If the headstone is excessively expensive, the costs will simply be reduced to an appropriate level.

Grave maintenance costs may also reduce inheritance tax, even if they arise over many years after the death. These costs are generally calculated based on their capital value – i.e. the amount required to cover all future maintenance costs for the statutory resting period.

Alternatively, costs may be recognised where a grave maintenance contract exists or where a legacy obliges the heirs to fund such maintenance.

Administration, settlement and distribution of the estate

Costs relating to the administration, settlement and distribution of the estate are often the largest deductible items. These categories are expressly recognised in Section 10(5) ErbStG.

Only costs directly connected with:

• the administration,
• the settlement, and
• the distribution

of the estate are deductible.

Important: Costs of estate management and realisation are not deductible. For example, the costs of ongoing executorship (long-term administration) are excluded. Similarly, costs of selling estate assets are generally not deductible, as they lack a sufficiently direct connection.

A close temporal and factual connection to the inheritance event is also required.

Example: Legal costs arising from litigation are no longer deductible if the proceedings begin several years after the death (e.g. 7 years later, as held by the Münster Fiscal Court in 2022).

Let us look at specific categories of deductible costs:

Administration and settlement of the estate

These include costs arising from court or administrative procedures related to the death, such as:

• probate proceedings (certificate of inheritance),
• land register corrections,
• expert valuation costs (e.g. for compulsory share claims),
• court proceedings (e.g. challenging a will),
• tax adviser fees for preparing the inheritance tax return.

Estate administration costs

These are costs directly linked to the inheritance and the obligations of the heirs, such as:

• repayment of debts,
• fulfilment of legacies.

Notary and land register costs may be deductible, for example, where property must be sold in order to fulfil a legacy.

Important: The sale of property without a legal necessity is considered estate realisation and is not deductible.

Distribution of the estate

Costs may also arise when the estate is divided among the heirs.

These include:

• transferring property to a specific heir (notary, land register),
• expert valuation costs,
• legal advice and court costs related to the distribution.

Such costs are deductible, unlike costs arising from sales to third parties.

Costs of executorship

Where executorship has been appointed, reasonable costs of administering the estate are deductible. However, costs of long-term executorship are not deductible, as they fall under estate management.

Note: If the deceased specified an excessive remuneration, only a reasonable amount is deductible. If no remuneration was specified, it is determined in accordance with Section 2221 BGB.

Taxes and tax advisory costs

Inheritance tax itself is not deductible, nor are legal costs relating to disputes over inheritance tax.

However, there is no explicit BFH case law excluding tax advisory costs. The tax authorities generally allow such costs to be deducted – even costs arising from voluntary disclosures in cases of undeclared inheritance tax (BFH, judgment of 14 October 2020, II R 30/19).

When can costs be claimed to reduce tax?

A key question is when heirs can claim costs to reduce their inheritance tax liability.

Costs incurred up to the submission of the inheritance tax return (e.g. funeral costs) are usually declared directly in the return.

Other costs (e.g. final headstone costs or legal fees) often arise only after the return has been filed. These fall after the so-called tax assessment date.

In such cases, it is the responsibility of tax advisers to ensure that the tax assessment is issued on a provisional basis (Section 165 AO) so that it can later be adjusted.

Alternatively, the assessment may be issued subject to review (Section 164 AO). In that case, relevant costs can still be claimed after the assessment has been issued, provided it has not yet become final.

Important: Once the provisional status has been lifted, costs can no longer be claimed, according to the BFH.

Using knowledge and professional advice to reduce tax

Costs associated with a death can significantly reduce the inheritance tax burden. It is therefore important to keep track of such costs and retain supporting documentation so that tax advisers can make the most of available tax-saving opportunities.

Heirs can claim not only debts and estate liabilities but also a wide range of costs connected with the inheritance event in order to reduce inheritance tax (Section 10(5) ErbStG).

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Answers to frequently asked questions about deductible costs for inheritance tax purposes:

Which costs can reduce inheritance tax?

Inheritance tax can be reduced by deducting debts, estate liabilities and certain costs connected with the inheritance. These include funeral costs, the cost of a reasonable headstone and grave maintenance, as well as costs relating to the administration, settlement and distribution of the estate. These items reduce the taxable value of the estate and therefore the heirs’ tax burden.

What is the lump sum for estate-related costs?

The lump sum allows heirs to deduct a fixed amount of costs without providing detailed evidence.

It amounts to €15,000 for deaths occurring from 1 January 2025 and €10,300 for earlier cases. The lump sum applies per estate and is shared among all co-heirs.

It is particularly useful where actual costs are lower than the lump sum or difficult to prove.

Can costs incurred after filing the tax return be taken into account?

Yes, costs arising at a later stage may still reduce inheritance tax. The condition is that the tax assessment is issued on a provisional basis or subject to review.