Estate includes property: No exemption from inheritance tax in the event of demolition

Properties in an estate can often become a problem, not only because this might lead to disputes in cases involving multiple heirs, but also in connection with inheritance tax.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London conclude: If an estate includes properties, the testator’s surviving spouse, his registered civil partner or his children may be able to apply for an exemption from inheritance tax. Irrespective of the applicable tax allowances, this is possible if the heir personally makes use of the property for residential purposes for at least ten years.

Having said that, use of the property does not encompass demolishing the old building and erecting a new construction on the inherited land. That was the verdict of the Finanzgericht (FG) München [Fiscal Court of Munich] in its ruling of October 22, 2014 (Az.: 4 K 847/13). The case concerned a deceased mother who had left her son assets worth almost 650,000 euros. The estate also included a plot of land with a small house, but this was in a deplorable state and barely habitable. The son therefore had the house demolished and wished to build a new one. However, the competent tax office did not go along with this. It chose only to recognize the tax allowance of 400,000 euros and demanded the inheritance tax due for the remaining portion.

The heir refused to accept the tax assessment but was unable to convince the Court. The latter held that an exemption from inheritance tax would only have been possible if the son had personally made use of the house after renovation work had been carried out instead of demolishing it. The FG München went on to say that following the letter of the law demolishing the house and the subsequent construction of a new building was not analogous to using the inherited property.

When it comes to matters pertaining to succession, one ought to take advantage of the legal room for manoeuvre in order to prevent the heirs from being encumbered with an excessively high tax burden. Lawyers and tax advisors who are versed in the field of succession law can advise on issues relating to estates.

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