The subject of inheritance is governed by a complex legal framework, which is why many people prefer not to address it during their lifetime. However, without early planning, the available allowances within inheritance tax cannot be used effectively, resulting in unintended tax burdens.
Allowances for Inheritances and Gifts
The basis for taxing inheritances or gifts is the degree of kinship. As a general rule, the closer the heir is to the deceased, the higher the tax-free allowance. This rule applies not only in the case of inheritance but also equally to gifts of assets. The legislator assigns recipients and heirs to one of three inheritance tax classes. These are independent of the wage tax classes and likewise depend on the degree of kinship. The following table shows the allowances available to different groups of persons in the event of an inheritance or gift at the current point in time:
Allowances for Inheritances and Gifts
Degree of kinship
General allowance (Euro)
Pension allowance (Euro)
Allowance for household items (Euro)
Allowance for other assets (Euro)
Tax Class I
Spouses,
registered
civil partners
500,000
256,000
41,000
12,000
Children, stepchildren, adopted children, children of deceased children
400,000
10,300 –
52,000
41,000
12,000
Other grandchildren and stepgrandchildren
200,000
0
41,000
12,000
Great-grandchildren
100,000
0
41,000
12,000
Parents, grandparents and great-grandparents
100,000
0
41,000
12,000
Tax Class II
Siblings,
nieces and nephews,
sons- and daughters-in-law
and parents-in-law,
stepparents,
divorced spouses,
partners of a
dissolved
civil partnership
20,000
0
12,000
Tax Class III
Uncles, aunts, unmarried partners, neighbours, friends and others
20,000
0
12,000
As shown in the table, recipients and heirs receive—alongside the general allowance, which applies to monetary assets, real estate, securities, etc.—additional allowances for specific items. These include the pension allowance (e.g. retirement pensions, widow's and orphan's pensions, etc.), the allowance for household items (e.g. all furniture and household appliances) and the allowance for other assets (e.g. cars, boats, etc.). The group consisting of parents, grandparents and great-grandparents is an exception. As shown in the table, they fall within Inheritance Tax Class I. However, this only applies in the case of an inheritance; in the case of a gift, they belong to Tax Class II. The pension allowances granted to the children, stepchildren, etc. belonging to Inheritance Tax Class I are awarded depending on the age group (children up to 5 years: €52,000; children up to 10 years: €41,000; children up to 15 years: €30,700; children up to 20 years: €20,500; and children up to 27 years: €10,300).
Taxation of an Inheritance or Gift Exceeding the Tax-Free Allowance
The taxation of inheritances or gifts depends on the inheritance tax class mentioned above as well as on the value of the taxable assets. The table below sets out the precise rates of taxation:
Taxable
inheritance or gift up to …
Tax rate by tax class
I
II
III
75,000 Euro
7 %
15 %
30 %
300,000 Euro
11 %
20 %
30 %
600,000 Euro
15 %
25 %
30 %
6,000,000 Euro
19 %
30 %
30 %
13,000,000 Euro
23 %
35 %
50 %
26,000,000 Euro
27 %
40 %
50 %
Over 26,000,000 Euro
30 %
43 %
50 %
Tips for Reducing the Tax Burden
Despite the complexity of the subject, there are several practical points to consider in order to reduce the tax burden for heirs or recipients as far as possible. These include:
- Significant disadvantages for unmarried couples
It is important to note that inheritances or gifts within an unmarried partnership are considerably more expensive in tax terms. Such partners are treated as strangers under tax law and fall within Inheritance Tax Class III. They are therefore granted a general allowance of only €20,000. By comparison, a married partner is entitled to a general allowance of €500,000.
- Using allowances repeatedly
It is important to note that the available allowance can be used again every 10 years. For this reason, where the asset value is high and exceeds the available allowances, it makes sense to gift part of the assets in advance. In this case, recipients and later heirs can benefit from a tax-free transfer of assets on more than one occasion.
- Equal distribution of assets
In many cases, one of the two partners holds the majority of the assets. The problem this creates is that, due to the uneven distribution, the heirs may exceed the allowance available with respect to one partner without having fully used the allowance available with respect to the other partner. If, on the other hand, the assets are evenly distributed between both partners, it becomes less likely that the heirs will have to pay tax on the assets.
Frequently asked questions
Frequently asked questions
Which allowances apply to spouses and children in cases of inheritance or gift?
Spouses and registered civil partners are entitled to a general allowance of EUR 500,000, while children, stepchildren, adopted children, and children of deceased children receive EUR 400,000. Grandchildren are granted EUR 200,000, and great-grandchildren as well as parents and grandparents (in the case of inheritance) receive EUR 100,000 each. In addition, there is an allowance for household goods (EUR 41,000) and for other movable assets (EUR 12,000).
Which inheritance tax classes exist and who falls into which class?
Tax Class I covers spouses, registered civil partners, children, grandchildren, as well as parents and grandparents (the latter only in cases of inheritance). Tax Class II includes siblings, nieces, nephews, sons- and daughters-in-law, stepparents, divorced spouses, and parents and grandparents in cases of gifts. Tax Class III applies to all other persons, such as uncles, aunts, unmarried partners, friends, and neighbors.
How high is the pension allowance (Versorgungsfreibetrag) for children in the case of an inheritance?
The pension allowance for children is staggered by age: up to 5 years 52,000 euros, up to 10 years 41,000 euros, up to 15 years 30,700 euros, up to 20 years 20,500 euros, and up to 27 years 10,300 euros. For a surviving spouse or registered civil partner, the pension allowance amounts to 256,000 euros.
What are the inheritance tax rates by tax class and asset value?
In tax class I, rates range from 7% (up to EUR 75,000) to 30% (over EUR 26 million). In tax class II, they range from 15% to 43%, and in tax class III from 30% to 50%. The applicable rate is applied to the assets exceeding the personal allowance.
How can tax-free allowances be used multiple times through lifetime gifts?
Personal tax-free allowances can be claimed again every ten years. For substantial assets, it is therefore worthwhile to transfer portions of the estate early in order to use the allowance multiple times. An equal distribution of assets between spouses is also advisable so that both partners' allowances can be utilised optimally.
Why are unmarried couples disadvantaged for tax purposes in inheritance and gift situations?
Partners without a marriage certificate or registered civil partnership are treated as unrelated persons for tax purposes and fall into tax class III. They receive only a general allowance of EUR 20,000, while married partners are entitled to EUR 500,000. In addition, a 30% inheritance tax rate applies from the very first euro of taxable transfer.