Navigating Inheritance and Gift Transfers: Steering Clear of Pitfalls, Minimizing Tax Obligations
A New Spin on Wealth Transfers in Germany: Steering Clear of Tax Headaches
Eager to pass your hard-earned assets to the next generation while keeping the taxman at bay? Well, Germany's chain gift tax strategy might just be the solution you've been looking for. Here's a rundown of this intricate wealth transfer tactic and some key tips to keep in mind:
1. Unraveling the Chain Gift Mystery
One of my friends, who's been taking great care of my aging parents, is eyeing an equity portfolio worth about 250K Euros. As a relative not in the direct line, she's only got a fairly low tax-free allowance of 20K Euros for the second tax class. With a gift tax rate of 20%, 46K Euros in taxes would be due if she takes the portfolio directly. But a pal of hers suggested employing a chain gift. What are the crucial aspects of this tax-savvy approach?
It makes more financial sense to gift the portfolio not to your friend, but to her partner first. Parents can bestow gifts up to 400K Euros tax-free every ten years to their offspring in the first tax class. The partner can then hand the portfolio over to his spouse, and as a spouse, he's eligible for a tax-free allowance of 500K Euros, which can be used again every ten years.
Important to remember: The chain gift arrangement is only acceptable if the beneficiary can manage the transferred wealth without restrictions. The initial gift should not be contingent on passing it on, and changing the same portfolio won't work, as it could lead to accusations of tax evasion according to the German Federal Fiscal Court. The duration between the first and second gift doesn't matter, and combining both gifts in one document won't necessarily exhaust the first tax class, as confirmed by the Federal Fiscal Court in a recent ruling.*
2. Navigating the Perils of Half-House Sales
I recently inherited a half house from my deceased husband, who had a usufruct right over it. My father-in-law, who also passed away a year ago, gifted this half house to my husband way back in 2003. Now I'm planning to sell it to my sister-in-law. Do I need to pay capital gains tax on this transaction, and will it even be relevant fiscally?
Luckily, no capital gains tax or fiscal relevance applies to such transactions, as the property was used personally by the deceased. The property was thus exempted from being considered a 'new acquisition' for tax purposes. Since the ten-year period for private sales transactions has been met, the sale can be made tax-free.*
Additional fiscal quirk: Surviving spouses do not have to pay inheritance tax on the house or property of the deceased, regardless of the market value, if they reside in it for at least ten years as their primary residence. This tax exemption is also extended to children and grandchildren provided the living space does not exceed 200 square meters. The condition is that the heirs must actually reside there. Only one object can enjoy the tax exemption.*
3. Uncovering the Hand-me-down Secrets of Protected Properties
I recently inherited a heritage-protected house in southern Germany from a distant relative. My inheritance tax allowance of 20K Euros isn't very high compared to the extensive renovations I need to carry out to make it habitable again. Am I eligible for the 85% tax break if my goal is to make it available for public education?
In order to obtain an 85% tax exemption for heritage-protected objects in Germany, there should be a temporal nexus between the acquisition and the implementation of measures to make it usable (Tax Court of Münster – Case No. 3 K 2935/20 Erb). A subsequent multi-year execution phase of the renovation measures will not negatively impact the application. A recent case revolved around an heir who intended to make a heritage-listed Friesian house from the 17th century habitable for public education. Despite the tax office refusing the tax reduction, the heir was successful in their appeal to the Federal Fiscal Court, which is expected to issue the final ruling soon.*
4. Tax Breaks for Ailing Heirs
In Germany, close relatives are not liable for inheritance tax on the dwelling of the deceased if they live there as their primary abode for at least ten years. If health issues force them to vacate the property, does this tax advantage still apply?
The tax exemption remains valid if heirs cannot utilize the property due to compelling reasons, such as health issues. The Federal Fiscal Court has broadened this privilege, allowing the heir to keep the tax exemption even if they cannot live there without assistance.*
5. Mental Wellbeing Matters Too
Seven years ago, I inherited a small house from my late father, but now I'm not mentally fit to manage the household. Am I still eligible for the inheritance tax exemption on the family home since I'm planning to move to a senior living facility?
As a surviving spouse, you may not pay inheritance tax on the house or apartment of the deceased if you reside there for at least ten years as your primary abode. This tax exemption is also applicable to children and grandchildren if the living space does not exceed 200 square meters. The tax exemption is also valid if family members must vacate the property due to compelling reasons, such as health reasons.*
Even if you leave the house due to depression, the inheritance tax exemption will not be retracted retroactively. The Federal Fiscal Court (BFH, Az. II R 1/21) has ruled in favor of a beneficiary who sold the property and moved to an apartment, as her departure from the house was due to a depressive disorder that had worsened after her husband's death and the hostile environment of the shared house. The BFH determined that compelling reasons existed when the use of the family home was psychologically intolerable for the heirs.*
For more insights on "Saving taxes on property transfers," read the latest issue of €uro monthly magazine 11/2022 available at newsstands or here as a digital edition
Pro Tip: Use the German chain gift tax strategy wisely, ensuring each transfer is a genuine one with no concealed agreements or hidden strings. Maintain a clean record of all transactions for proof of compliance. It's essential to consult tax and legal experts, avoid any artificial or sham transactions, clearly report all gifts, and make any family agreements transparent to steer clear of any tax-related issues.
1. Chain Gift Transfers for Maximized Allowances: Delaying the transfer of an equity portfolio can help reduce tax liability by employing a chain gift strategy. This involves transferring the portfolio from the parents to a relative in the first tax class, then to a spouse in the second tax class, allowing them to utilize their higher tax-free allowances.
2. Exempting Inherited properties from Capital Gains Tax: If you inherit a property that was used personally by the deceased, it won't be considered a new acquisition for tax purposes, and there will be no capital gains tax levied when selling the property to a family member.
3. Renovation of Heritage-Protected Properties: To avail yourself of an 85% tax exemption for a heritage-protected property, there should be a temporal nexus between the acquisition and the implementation of measures to make it usable. Subsequent multi-year execution phases will not affect the application, even if the renovation process is lengthy.
4. Tax Exemption for Heirs at Compelling Circumstances: If close relatives cannot reside in an inherited property due to compelling reasons, such as health issues, they can still enjoy the inheritance tax exemption. The tax exemption is also valid if departing from the property becomes psychologically intolerable, making it necessary to move into a senior living facility or another house.
