Inheritance tax where estate includes real estate

In succession cases involving real estate, it is particularly important to pay attention to details when it comes to inheritance tax. Those who are not careful may be asked to pay up by the exchequer.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London conclude: If residential property is passed on to the spouse or children, they are first of all able to assert their tax allowances. In the case of spouses, this amounts to 500,000 euros, whereas the figure for children is 400,000 euros. Beyond these amounts, it is possible to obtain an exemption from inheritance tax under certain circumstances. However, the heir himself needs to personally make residential use of the inherited apartment or house for a period of at least ten years for this to happen. If, for example, ownership of the property is transferred to the children within this ten year period, inheritance tax may be demanded retrospectively. That was the verdict of the Finanzgericht (FG) Hessen [Fiscal Court of Hesse] in its ruling of February 15, 2016 (Az.: 1 K 2275/15).

In the case in question, the son had inherited the house of his mother who had passed away in 2009. He lived in this house together with his wife. For this reason, he was exempt from inheritance tax. The assessment notice from the tax office stated that the tax exemption would be retrospectively cancelled if the heir ceased making personal use of the family home for residential purposes within a timeframe of ten years from the acquisition, unless there are compelling reasons preventing him from doing so.

About four years later, the heir transferred the property to his children while retaining beneficial interest and a permanent right of residence for himself and his wife. The tax office got in touch again shortly thereafter to retrospectively demand the inheritance tax. The heir brought an action against this, but was unsuccessful.

The FG Hessen ruled that this subsequent taxation was legitimate following the plaintiff’s transfer of ownership in the house to his children. The Court went on to say that while the wording of the relevant legislation does not explicitly require that ownership be retained, the intention of the legislature is to be interpreted in such a way that ownership is required in addition to personal use in order to receive an exemption from inheritance tax.

Lawyers who are competent in the field of succession law can advise on all matters relating to inheritances.

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