The planned inheritance tax reform is a bureaucratic monster. At least that’s the impression given, because even recognized experts disagree. FOCUS online brings light into the dark with the tax expert Hans-Joachim Beck from the IVD.
Desperate 83-year-old Gisela Äckerlein stirs up spirits. Do we sell our home because the heirs can no longer afford the inheritance tax? Briefly on the facts: Gisela has her own home, which was worth almost five million euros in 2018. Probably a lot more today. And she is worried that her daughter will not be able to pay the inheritance tax after her death and will therefore have to sell the house to pay the tax. She finds that unfair.
The problem is discussed online on FOCUS and there are also critical voices – such as from Matthias Loose, judge at the Federal Fiscal Court. He has commented on the subject on LinkedIn and is of the opinion: “The legislature is not planning any reform of inheritance tax, but is adapting regulations on valuation law – to avoid (so far) unfair treatment of different assets.” And continues to write: “This house will probably not be affected by the higher values because there will be no major changes in the discounted earnings method.”
Tax expert Hans-Joachim Beck from the IVD is not so sure. First of all, it must be checked whether it is a single-family or two-family house. “According to the Valuation Act, such properties are generally valued using the comparative value method. However, in many cases there are no suitable comparative values, as there are no cases in which comparable properties were sold in a timely manner. In these cases, according to the Valuation Act, the material value method must be used,” explains Beck. And further: “In the capitalized earnings method, rental properties are valued. These are properties that are not single or two-family houses. The valuation discount of § 13 d Abs. 3 ErbStG only applies to rented apartments.
Beck confirms that there is a substantive exemption for owner-occupied single-family homes under inheritance tax law. However, this is subject to very narrow and strict conditions.
Expert Beck continues: “In addition, the deceased must have lived in the apartment until the inheritance (family home). Insofar as he was prevented from using it himself for compelling reasons (e.g. due to illness or external work), this is harmless if the apartment is immediately intended for use by the purchaser for his own living purposes. If the acquiring partner has not previously used the property for residential purposes himself, he must immediately start using it for his own residential purposes.”
If the inheritance occurs, the spouse or life partner must immediately use the family home for their own living purposes for 10 years. According to Beck, the tax exemption is completely eliminated – and not just pro rata – if he gives up self-use within 10 years. However, no interest is charged. Giving up self-use is only harmless if it occurs for compelling reasons.
These remarks already show what the problem is. Expert knowledge is required in order to be able to assess the facts. And for the heirs, the problem arises that they often cannot meet these usage requirements: the surviving spouse may want to move to a smaller apartment because the children are now grown up and live in another city.
Therefore, she asks about a donation that was made while she was still alive and that Gisela Äckerlein had already made in order to exhaust the allowances.
According to Beck, in the case of a donation, there are no specifications for use by the recipient. In addition, the upper limit of 200 m² of living space does not apply to gifts to children.
Beck goes on to say: “It is correct that Section 28 (3) allows for an interest-free deferral of inheritance tax and that this provision does not apply to donations. It must therefore be checked in each individual case whether a donation is the right way to go. However, experience teaches that a gift during one’s lifetime is almost always the better way, especially if the property is given away subject to usufruct.”
He also has a clear opinion on the published example with Ms. Äckerlein: “The published example plays down the problem rather than exaggerating it. The full severity of the problem becomes apparent when you change the example as follows: Detached house, provisional material value of the building: 300,000 euros, plot of land 600 m², standard land value 1,000 euros.”
Even after the increase in value on January 1st, 2023, it will generally make tax sense to give away the house while you are still alive. Especially in the case of a donation subject to usufruct, the later heirs save a lot of tax. The donation of the family home to the spouse is exempt from tax according to Section 13 Paragraph 1 No. 4 ErbStG.
Of course, you should never make such a gift just for the sake of tax savings. If you don’t want to give up your house during your lifetime, for example because it’s your only asset and you might need it again later, you should keep it. Only those who want to transfer their house to the probable heirs should prefer this and, if necessary, agree on a reservation of usufruct. In his opinion, real estate values will continue to rise after January 1st, 2023.