On December 5, 2008, the Bundesrat (Federal Council) approved the law reforming inheritance tax and valuation law (ErbStRG) in a special session, after the reform package had already passed through the Bundestag (Federal Parliament) on November 27, 2008.
The reform will come into force on January 1, 2009.
For the period between January 1, 2007 and December 31, 2008, a right to choose between the old and new regulations of the inheritance tax and valuation laws is planned upon request – however, only in the case of inheritance and not gift. The right to choose does not extend to the higher tax-free allowances, but primarily to the valuation rates.
The main changes are as follows:
- The tax rates (tariffs) for tax classes II and III are very high; the tariff starts at 30% in both stages and ends at 50%.
- The personal allowances have been increased.
- The inheritance tax reform law provides for the valuation of business assets at their market value. Tax exemption is dependent on certain rules of conduct, such as the continuation of business operations. Entrepreneurs can choose whether they want to make 85% of the favored assets tax-free after a holding period of seven years or 100% of the favored assets tax-free after a holding period of ten years.
- There were simplifications in the definition of asset-managing business assets.
- A house that is the owner's primary residence remains tax-free regardless of its value, even in the event of inheritance, if it goes to the spouse or registered partner and the successor continues to live in it for at least ten years. The same applies to children, although in this case it is limited to a floor area of 200 square meters.
- A new § 35b EStG reduces a double burden with inheritance and income tax in the event of inheritance.
- There will be an interest-free tax deferral for rental properties and owner-occupied properties.
- If a partner is compensated at less than the market value, this does not constitute a taxable acquisition.
- The rules for the valuation of real estate, shares in corporations and business assets are not laid down in statutory instruments, as originally intended, but directly in the law.
1. Overview ofthe tax-free allowances and rates
In tax classes II and III, the tariff starts immediately at 30% and ends at 50%. Despite the slight increase in the personal allowance to EUR 20,000, this will lead to a significant tightening, since the rates will be applied to a broader tax base as they approach market values for all types of assets. In tax class I, the tax rates remain unchanged – except for euro smoothing in the progression stages – but personal allowances are increasing. This also applies to registered partners, who are treated the same as spouses in many areas of the ErbStG. However, he remains in tax class III.
- Personal and material allowances under the current and new law
|
|
currently
|
from 2009
|
increase
|
|
spouse
|
307,000
|
500,000
|
193,000
|
|
registered partner
|
5,200
|
500,000
|
494,800
|
|
Children, stepchildren and grandchildren, if parents are deceased
|
205,000
|
400,000
|
195,000
|
|
grandchildren
|
51,200
|
200,000
|
148,800
|
|
parents and great-grandparents in the event of inheritance
|
51,200
|
100,000
|
48,800
|
|
Tax class II (siblings, nieces, parents in the case of gifts)
|
10,300
|
20,000
|
9,700
|
|
Tax class III (distant relatives, cohabiting partners)
|
5,200
|
20,000
|
14,800
|
|
Pension allowance for spouse
|
256,000
|
256,000
|
0
|
|
registered civil partner
|
0
|
256,000
|
256,000
|
|
- children, staggered according to age
|
up to 52,000
|
up to 52,000
|
0
|
|
Restricted taxpayers
|
1,100
|
2,000
|
900
|
|
Household effects tax class I
|
41,000
|
41,000
|
0
|
|
Movable objects I
|
10,300
|
12,000
|
1,700
|
|
Household goods and other items in Classes II and III
|
10,300
|
12,000
|
1,700
|
- Tax rates in percent under the old and new law
|
Assets up to EUR
|
Class I
|
Class II
|
Class III
|
|
Old
|
new
|
old/new
|
old
|
new
|
old
|
new
|
|
52,000
|
75,000
|
7
|
12
|
30
|
17
|
30
|
|
256,000
|
300,000
|
11
|
17
|
30
|
23
|
30
|
|
512,000
|
600,000
|
15
|
22
|
30
|
29
|
30
|
|
5,113,000
|
6,000,000
|
19
|
27
|
30
|
35
|
30
|
|
12,783,000
|
13,000,000
|
23
|
32
|
50
|
41
|
50
|
|
25,565,000
|
26,000,000
|
27
|
37
|
50
|
47
|
50
|
|
thereafter
|
30
|
40
|
50
|
50
|
50
|
2. Worsening for relatives, too
Unmarried partners, parents, siblings, cousins, nephews and nieces are in a significantly worse position. The higher tax rate has an extremely negative impact, as only EUR 20,000 remains tax-free and the higher tax rate from 2009 onwards applies to a house value that has doubled on average.
In regions with high property values, the new law even results in a significantly higher tax burden when the transfer or inheritance skips a generation if the property is acquired within the family. This also means that "Grandma can give her little house to me tax-free" no longer applies.
Registered civil partnerships, which, like spouses, inherit by law according to the German Civil Code (BGB), are not affected in the same way. They still belong to the unfavorable tax class III with a 30% starting tax rate. However, since they receive an allowance of EUR 500,000, the high tax rate does not apply that often.
3. Owner-occupied residential property
From 2009, registered civil partners can also transfer the family home free of charge and tax-free among the living, as has been the case for spouses up to now. There is no holding period in this respect.
There is now also a tax exemption in the event of inheritance in this regard. This is subject to the following conditions: the spouse or registered partner can receive the owner-occupied residential property tax-free if the testator lived in it until his or her death. The value and size of the property are not relevant.
However, the surviving spouse or partner must actually use the family home for their own residential purposes. If he or she gives up this use within ten years (sale, rental or use as a second home), the tax exemption will be retrospectively withdrawn. However, this does not apply if there are compelling reasons (e.g. admission to a nursing home or the death of the widow or widower).
When drafting the will, care should be taken to ensure that the surviving spouse receives the property alone and not in a community of heirs with the children, provided that they do not live in the house.
As a result of the inheritance tax reform, for the first time there is a tax exemption in the event of inheritance with regard to family homes for children and grandchildren if their parents are already deceased. If the living area is over 200 square meters, the excess area is taxable. For example, if the house is 230 square meters, 30 square meters are taxable.
When drawing up a will, it is important to note that, in the case of several children, the tax exemption only benefits the child who actually lives in the house.
4. Equitable relief in real estate
Under the new law, real estate will be valued higher. The market value is now the decisive factor. It is estimated that this will increase the valuation rates by 40-50% on average. However, these increased valuations for real estate are not intended to lead to a forced sale for the sole purpose of paying the inheritance tax due on it. For these reasons, there is the option of an interest-free deferral of the inheritance tax due on the preferential acquisitions. If the owner ceases to use the property because of the sale, the deferral will be forfeited. If the property is rented out after the end of the owner-occupation period, a further deferral can be obtained, in which case the deferred inheritance tax must be paid from the rental income.
The legal claim to deferment does not exist if
the acquirer can pay the inheritance tax due on the assets from other acquired assets.
· the acquirer can pay the tax from his or her existing own assets.
the donor can be held liable for payment of the gift tax.
5. Valuation of real estate
Real estate held as private assets should generally be recognized at market value. Until now, the so-called requirement value was used, which was only about 40-50% of the market value
6. Business assets
The previous regulation was replaced by two options. The choice is binding for business assets, agricultural and forestry assets and shares in corporations and cannot be revised at a later date.
- 7-year rule: 85% of the favored business assets remain tax-free if the company is continued for seven years. 15% of the business assets are classified as non-productive and therefore not favored. The tax on this non-operating assets must always be paid immediately, unless the exemption limit of EUR 150,000 applies. The wage bill must not have fallen below 650% of the starting amount at the end of the entire period and is not indexed. The non-harmful administrative assets may not exceed 50%. Each year, 14.28% of the assets are no longer exempt.
- Upon application, 10-year period: 100% of the favored business assets remain tax-free if the company is continued for ten years. The wage bill at the end of the entire period must not have fallen below 1,000% of the starting figure and is not indexed. The non-harmful administrative assets may not exceed 10%. Each year, 10% of the exemption is lost.
Example of the 7-year period: the wage bill does not reach the required 650% in the 7 years, but only 520%, with a fair market value of the business of EUR 10 million. The wage bill has then only reached 80% of the required wage bill. Of the achievable tax exemption of €8.5 million (85% for the seven-year solution), only a tax exemption of 68% remains (20% less). Instead of €1.5 million, €3.2 million is then taxable.
This criterion is not used for companies with up to ten employees.
The sale of the company, the termination of business operations and the disposal of significant operating assets also result in the loss of tax exemption. This is then also calculated as a percentage of the total value if partial sales occur. However, this does not apply to a sale if the sales proceeds are invested in corresponding assets within six months. This includes not only the acquisition of new businesses, parts of businesses or assets that replace the assets sold, but also the repayment of business debts or the increase of liquidity reserves.
If the successor withdraws more funds from the business than the business yields in profits by the end of the seven- or ten-year period, this also results in the loss of the tax exemption.
The so-called administrative assets are not included in the exemptions that will apply to business assets. These now include:
- land leased to third parties for use, except in the case of a split of a business, land within a group of companies as defined in § 4h of the German Income Tax Act (EStG), a business lease where the heir was already the tenant, a gift where the donee is initially not yet able to run the business themselvesand has therefore initially leased it to a third party for a transitional period of up to ten years, of residential real estate if it is transferred as part of a commercial business, leased agricultural and forestry properties.
- Shares in corporations, if the interest is 25% or less and they are not attributable to the main purpose of a credit or financial services institution.
- Investments in partnerships if their administrative assets amount to more than 50%.
- Securities and similar claims, provided they are not attributable to the main purpose of a credit, insurance or financial services institution.
- Art objects and collections, scientific collections, coins, precious metals and stones, if trade or processing is not the main purpose of the business.
- Administrative assets under 10 or 50%, respectively, that have been attributed to the business for less than two years at the time of taxation.
7. Conclusion
The regulation is not to be welcomed overall, as it leads to a significant additional tax burden. However, what weighs much more heavily is the fact that, with regard to business assets, restrictions are imposed on the buyer that force him to manage the company not according to economic aspects but according to the state's guidelines. It is at least doubtful whether the regulation will stand up to constitutional requirements.
The statements represent initial information that was current for the law applicable in Germany at the time of initial publication. The legal situation may have changed since then. Furthermore, the information provided cannot replace individual advice on a specific matter. Please contact us for this purpose.