Facts:
The claimant was the sole testamentary heir of her deceased husband. The estate included a one-half share of a single-family house which, until the testator's death, had been used by the spouses jointly and thereafter was and continues to be used by the claimant alone for her own residential purposes. The acquisition of the testator's one-half share was treated as tax-exempt in the inheritance tax assessment.
By notarial deed, the claimant transferred the property to her daughter a few months after the inheritance tax assessment was issued, subject to a lifelong reserved usufruct in favour of the claimant, who continues to use the house for her own residential purposes.
The tax office amended the inheritance tax assessment and levied inheritance tax, taking the view that the requirements for subsequent taxation under § 13 (1) No. 4b sentence 5 ErbStG were met because the daughter had transferred real property.
The claimant filed an objection against the amended inheritance tax assessment, arguing that subsequent taxation depended solely on the cessation of own use.
The objection was rejected as unfounded. The tax office took the view that the own use had to result from the acquirer's own right as owner and that own use as usufructuary was not sufficient.
The claimant brought an action before the Münster Tax Court, pursuing her request for annulment of the amendment notice by reiterating and elaborating on her submissions from the objection proceedings.
Decision of the Münster Tax Court of 28 September 2016, Az. 3 K 3757/15 Erb
The action is admissible but unfounded.
The Tax Court bases its decision in favour of the tax office on the fact that the tax exemption ceased to apply because the claimant transferred the real property to her daughter within ten years of acquiring it from the testator. It is not sufficient that the claimant continues to use the property for her own residential purposes on the basis of the reserved usufruct.
The wording of the statute does not expressly address the position of owner. However, parts of the literature take the view that, in the event of a transfer of ownership, the tax exemption does not lapse if the acquirer continues to use the family home — whether as a tenant or as a usufructuary. Other prevailing views distinguish according to the person to whom the acquirer transfers ownership. According to this view, the tax exemption should not lapse if the acquirer transfers the family home to his or her children, because an overall view permits the conclusion that the legislature did not seek to protect residential ownership in general but only within a "familial nexus of use and function".
In the view of the Münster Tax Court, the overall structure of the provisions on the tax exemption of the family home in the case of acquisition upon death by the spouse or by the children shows that the tax exemption requires use for own residential purposes based on the continuing legal position as owner. Under sentence 1 of the respective provision, the acquisition of ownership of the family home is tax-exempt. However, if ownership is further transferred either pursuant to an obligation imposed by the testator or for the purpose of dividing the estate, the tax exemption does not apply. These provisions show that the tax exemption is linked to the position of owner.
Nor does the Tax Court follow the view that the harmfulness of the transfer of ownership is to be assessed depending on the person to whom the acquirer transfers the family home.
Against such an overall view of the provisions in § 13 (1) Nos. 4b and 4c ErbStG, it must be noted that the Inheritance and Gift Tax Act always taxes a specific acquisition between two persons involved — here testator and acquirer on the basis of inheritance law provisions. Accordingly, consolidating the "chain of transfers" within the taxation of this individual acquisition would be inconsistent with the structure of the statute.
Leave to appeal was granted for the development of the law.
Source: Münster Tax Court
Frequently asked questions
Frequently asked questions
Does the inheritance tax exemption for a family home cease to apply upon transfer subject to a reserved usufruct?
Yes. According to the Münster Tax Court (judgment of 28 September 2016, 3 K 3757/15 Erb), the exemption under § 13 Abs. 1 Nr. 4b ErbStG ceases to apply if the surviving spouse transfers the inherited family home to a child within ten years – even if they reserve a lifelong right of usufruct and continue to occupy the property themselves. Mere personal use as a usufructuary is not sufficient, as the tax exemption is tied to continued ownership.
What requirements must continue to be met for the inheritance tax exemption of the family home under § 13 Abs. 1 Nr. 4b ErbStG?
The acquiring spouse must use the family home for their own residential purposes without undue delay after the inheritance and maintain this self-use as owner for at least ten years. A transfer of ownership within this ten-year period triggers retroactive taxation, even if actual use is continued.
Does it matter to whom the family home is transferred within the ten-year period?
According to the FG Münster, no. A transfer to one's own children is also harmful and leads to the loss of the tax exemption. The court rejects any differentiation based on the recipient, since German inheritance tax law always taxes only the specific individual acquisition between the decedent and the acquirer, and an overall view of the transfer chain would contradict the statutory framework.
Why is continued personal use as a usufructuary not sufficient to preserve the tax exemption?
The overall structure of § 13 Abs. 1 Nr. 4b ErbStG shows that the tax exemption is tied to the acquisition of ownership and the ongoing position as owner. This connection is already evident from the rule that the exemption lapses if the property is transferred onward due to an obligation imposed by the testator or for purposes of estate division. Mere use as a usufructuary is therefore not enough to maintain the tax exemption.
What planning consequences arise from the ruling for anticipated succession?
Heirs who wish to transfer a tax-exempt family home to their children should only do so after the ten-year retention period has expired in order to avoid retroactive taxation. A reserved usufruct also does not protect against the retroactive loss of the tax exemption. Since the appeal was admitted, comparable cases should be kept open and further case law monitored.