Inheritance tax

Inheritance tax is an issue that places a financial burden on heirs and is a major concern for people who want to settle their estate. Depending on the structure of the estate and the relationship of the heirs to the deceased person, inheritance tax can significantly reduce an inheritance or force heirs to sell family assets such as a family property.

Who has to pay inheritance tax?

In principle, heirs, beneficiaries of compulsory portions and legatees must pay inheritance tax. The tax is levied on the acquisition of assets from the estate of the deceased person. The legal basis for this is the Inheritance Tax and Gift Tax Act. If a community of heirs inherits, inheritance tax is assessed individually for each co-heir, even if the community of heirs has not yet been settled. The co-heirs can submit a joint inheritance tax return.

When is inheritance tax due?

The legal obligation to pay inheritance tax arises with the inheritance – in principle. However, the tax office only assesses inheritance tax once an inheritance tax return has been submitted.

The tax office issues a request to submit the inheritance tax return and sets a deadline for the submission of the inheritance tax return. However, even without a request, anyone who receives something from the estate is generally obliged to report the ‘acquisition by reason of death’ to the inheritance tax office within three months of becoming aware of it (so-called obligation to report). On the basis of the inheritance tax declaration, the inheritance tax assessment is issued with a deadline for payment. This deadline is then generally binding. However, an appeal against an inheritance tax assessment is of course also possible. As a rule, however, the appeal does not change the fact that the tax must initially be paid as assessed.

Tax allowances for dependants

However, not every heir, beneficiary of a compulsory portion or legatee actually has to pay inheritance tax. This is because, depending on the degree of relationship, relatives can claim tax allowances. No inheritance tax is then payable in the amount of the respective tax allowance.

For example, children have an inheritance tax allowance of 400,000 euros for each parent and spouses have an allowance of 500,000 euros for each other. If the value of the inherited assets is below this amount, there is no obligation to pay inheritance tax. If the value is higher, inheritance tax only has to be paid on the amount that exceeds the tax-free allowance.

Example: A child inherits a house worth 650,000 euros from their father. Only the amount of 250,000 euros is subject to inheritance tax. No tax is payable on the 400,000 euro value of the house.

It is important to note that unmarried couples are treated as strangers under inheritance tax law. They cannot claim any tax-free allowances!

Tax exemptions for relatives

Irrespective of tax allowances, there are parts of the estate that are not subject to inheritance tax up to a certain amount. These material tax exemptions have no effect on the tax-free amounts.

For individuals

• In tax class I, household contents up to 41,000 euros are tax-free and other movable property up to 12,000 euros (e.g. musical instrument). For spouses and children, owner-occupied residential property is exempt from inheritance tax under certain strict conditions (use by the deceased as a family home until death and subsequent immediate use by the spouse/child as a family home for at least ten years).
• Household effects and movable property worth up to 12,000 euros are tax-free for those in tax classes 2 and 3.

Three tax brackets for inheritance tax

The amount of inheritance tax in Germany is based on three tax classes:

Tax class I: This tax rate is the most favourable tax rate and applies to spouses, registered civil partners, children, grandchildren and stepchildren and some other close relatives.

Tax bracket II: This less favourable tax rate applies to more distant relatives such as siblings and siblings’ children, step-parents, parents-in-law, children-in-law and divorced spouses – if these persons inherit at all by will or intestate succession.

Tax class III: This is the least favourable tax class. It applies to all those who were not or only distantly related to the deceased, e.g. also cohabiting partners.

The actual tax rate depends on the tax class and the value of the assets that the heir, beneficiary of a compulsory portion or legatee receives from the estate – hereinafter referred to as the ‘value of the inheritance’:

Value of inheritance in € to	Tax class I	Tax class II	Tax class III
75.000	7 %	15 %	30 %
300.000	11 %	20 %	30 %
600.000	15 %	25 %	30 %
6.000.000	19 %	30 %	30 %
13.000.000	23 %	35 %	50 %
26.000.000	27 %	40 %	50 %
mehr als 26 Mio.	30 %	43 %	50 %

If a value threshold is exceeded, the higher tax rate generally applies to the entire acquisition.

Inheritance tax abroad

If, for example, a person owns real estate abroad and lives abroad for large parts of the year in old age, this can have an impact on inheritance law and inheritance tax – including significantly different tax-free allowances. The same inheritance can also trigger inheritance tax in several countries.

You can read more about this in our article ‘Property inherited in Italy – and now what?’.

Reduce inheritance tax through anticipated succession

However, inheritance tax and gift tax law makes it possible to reduce the inheritance tax burden. This is possible because people can transfer assets during their lifetime by way of a gift, e.g. to children or spouses, etc. In principle, the same tax-free amount applies to gifts and gift tax as for inheritances – and this applies again every ten years.

Read more about anticipated succession here.