Navigating Gifts and Inheritance! Tips for Steering Clear of Hazards and Slashing Taxes
Rewritten Article:
Passing Down Wealth in Germany: A Taxing yet Manageable Task
By: Stefan Rullkoetter
1. Navigating the Chain Gift Strategy
I'd like to gift a €250,000 equity portfolio to my selfless daughter-in-law, who's cared for my wife and me. However, her gift tax exemption is relatively low at €20,000. To minimize tax burdens, friends suggested a chain gift strategy. What should I consider in this tax planning approach?
Using a chain gift doctrine could save you tax dollars. Imagine gifting the portfolio first to your son (who's also your daughter-in-law's husband). Parents can transfer up to €400,000 to their children each decade without paying taxes — tax class I. Your son, in turn, can pass the portfolio to his wife. Spouses have a higher gift tax allowance of €500,000, renewable every decade.
When executing chain gifts, be aware of the conditions. The gifted property must be freely transferable. Additionally, each transfer should stand alone — meaning it can't be contingent upon other gifts. It's also best to exchange different portfolios to avoid suspicion of tax evasion. The time lag between gifts doesn't matter, yet combining them in one document won't necessarily result in tax class I [1].
2. Selling Half a House: Avoiding Tax Traps
I'm inherited a house half-share by my late husband, and my father-in-law had a usufruct right to it before his death. I intend to sell this half to my sister-in-law. Do I owe capital gains tax on this sale? Is there any chance of taxation at all?
Lucky for you, selling part of an inherited property isn't usually taxable, nor does it result in a fiscally relevant sales gain. This exemption occurs because the property was used by the deceased, making it exempt from new acquisition taxation. To meet the ten-year requirement for private sales exemptions, your residency in the property will count if your husband had lived there [2]. Moreover, if you and your spouse were living together and registering jointly as homeowners with the land registry during your marriage, you'd also owe no inheritance tax [3].
3. Tax Advantages for Heritage-Protected Properties
I own a heritage-protected house in southern Germany that I inherited from a distant relative. My low inheritance tax exemption doesn't even cover the costs of renovations needed to make the house livable. Under what conditions can I receive an 85% inheritance tax exemption?
The Münster Tax Court recently ruled that an inheritance tax exemption for heritage-protected properties hinges on temporal proximity between acquisition and making the property habitable. A subsequent renovation phase doesn't necessarily impede this exemption. If you want to claim an 85% tax exemption, prepare to demonstrate your intention to use the property for public education purposes [4]. It's crucial to note that the final court decision regarding this legal dispute is still pending: the finance court has allowed an appeal to the Federal Finance Court.
4. Inheritance Tax Waivers for Health Reasons
A relative recently died, leaving me a house as an inheritance. I live there, but due to unforeseen health issues, I need to move out temporarily. Will I still qualify for the inherited property tax exemption?
If you can't reside in the inherited property for "compelling reasons," you can still benefit from tax exemptions. The Federal Finance Court (BFH) allows such exceptions for instances when heirs cannot use the property due to health issues [5]. On the other hand, properties destroyed, rendered inaccessible, or in need of renovation without the owners' fault will continue to be exempt from inheritance tax [6]. To remain tax-free, heirs must occupy the property immediately after restoration and maintain residency until the end of the ten-year period.
5. Inheritance Tax Exemptions for Mental Illness
I inherited a house from my father seven years ago and have been living there ever since. Now, I struggle mentally to manage it and intend to move to senior housing. Will the exemption from inheritance tax applied to me?
Heirs are exempt from inheritance tax if they live in the house as their primary residence for ten years. In some cases, mental illnesses can justify moving. The Federal Fiscal Court (BFH) agreed with an heir who moved from an inherited house due to a depressive disorder triggered by her husband's death [7]. The BFH ruled that state of mind matters when determining compelling reasons.
For more information on "Saving taxes on inheritances and gifts," read the €uro monthly magazine 11/2022 available on newsstands or here as a digital edition.
Sources:
- BFH, Az. II B 37/21
- Anton-Rudolf Goetzenberger, Tax Advisor in Halfing near Rosenheim
- Finance Court of Hesse, Case No. 1 K 877/15
- Tax Court of Münster, Case No. 3 K 2935/20 Erb
- Federal Finance Court (BFH), Az. II R 18/20
- Federal Ministry of Finance [6]
- BFH, Az. II R 1/21
- Given the low gift tax exemption of your daughter-in-law, consider employing a chain gift strategy to minimize tax burdens, where you first gift the portfolio to your son, who, in turn, can pass it to his wife, taking advantage of their higher gift tax allowance of €500,000.
- Selling a half-share of an inherited house without capital gains tax is possible, especially when the property was used by the deceased and meets the ten-year requirement for private sales exemptions.
- For heritage-protected properties, an 85% inheritance tax exemption may be claimed if the property is intended for public education purposes and the renovation phase is within a reasonable time frame.
- Heirs who can't reside in an inherited property due to health issues may still qualify for inheritance tax exemptions, as recognized by the Federal Finance Court.
- Mental illnesses can potentially justify moving from an inherited house to senior housing, potentially qualifying the heir for inheritance tax exemptions, as ruled by the Federal Fiscal Court.
