- Inheritance Tax in Cases Involving Bequeathed Properties
- October 16, 2015 | Author: Michael Rainer
- Law Firm: GRP Rainer LLP - London Office
- Inherited properties are subject to inheritance tax. This can be a problem if the heirs do not have access to sufficient liquidity. It is possible for tax optimisation measures to be used.
GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London - www.grprainer.com/en conclude: Germany will be faced with an inheritance surge in the coming years. In many cases, properties will be bequeathed. Since these do not represent “liquid assets”, the inheritance tax due could become a problem for the heirs. However, it is possible for those inheriting the properties to benefit from tax breaks. Moreover, a distinction must be made between owner-occupied and rented housing.
If the property is personally occupied by the heirs, this can potentially result in no inheritance tax falling due. The legislature deliberately set high tax allowances for these cases. The tax allowance amounts to 500,000 euros for spouses and 400,000 euros for children. However, a prerequisite for these tax breaks is continued personal occupancy of the property by the heir for at least ten or occupancy by the heirs is not possible for compelling reasons. One such reason could be e.g. relocating to a nursing home. If, however, more distant relatives inherit the property, then inheritance tax is levied in most cases. In these instances, the tax allowances are generally as low as 20,000 euros.
If the property is not personally occupied by the heir, inheritance tax is levied. The basis for calculating inheritance tax is the market value of the property at the time of the testator’s death. In the case of properties rented for residential purposes, only 90 per cent of the market value is used when calculating inheritance tax. Nonetheless, inheritance tax can become a burden for the heirs in these cases. For this reason, it is possible to apply for deferral of the inheritance tax for a period of up to ten years.
In order to optimise the estate from a tax perspective, appropriate measures ought to be taken at an early stage. Measures laid out in a will might result in an unnecessarily high tax burden. If this is the case, the will should be updated in this respect. A gift during the lifetime of the testator can potentially entail tax advantages. Lawyers who are experienced in the fields of tax law and inheritance law can advise on these issues.