The inheritance tax is being reformed – that brings a lot of uncertainty. Above all, bequeathing and inheriting real estate is becoming more expensive. In many cases, a gift is cheaper. We get a lot of questions from readers about this. Hans-Joachim Beck, head of the tax department of the real estate association IVD, answers these questions here.
Tina T. writes: “My brother and I equally own and live in a newly built house (2017), which we pay off together in equal parts. Neither my brother nor I are in a relationship, neither have children nor a partner, and our parents have long since passed away. My brother is 90 percent disabled and we decided when we were still younger, as siblings (we only have each other), to always stick together, to be there for each other. If one of us were to die, the other sibling would have to be able to stay in the house. Would the person have to pay taxes even if he has been using the property himself for ten years?”
Hans-Joachim Beck: Yes, unfortunately the one who has lived longer would have to pay inheritance tax for the purchase of the half of the house that belongs to the other person. Only the personal allowance of EUR 100,000 would remain tax-free. Since siblings belong to tax class I, the additional value of half the house would be taxed at seven percent for a value of up to EUR 75,000, eleven percent for up to EUR 300,000 and 15 percent for a value of up to EUR 600,000.
There are factual tax exemptions for the family residence. However, these only apply to the surviving spouse or life partner (Section 13 (1) No. 4 b ErbStG) and for the children of the testator (Section 13 (1) No. 4 c ErbStG). There is no comparable tax exemption for siblings.
Nadine W. asks: “If you inherited a property a year ago and this EFH has not yet been sold, what value do you have to state this for inheritance tax? Do you take the agent’s estimated sales value or the market value, which is now significantly lower due to the current situation?”
Hans-Joachim Beck: The house is valued by the tax office for inheritance tax purposes in accordance with the provisions of the Valuation Act (BewG). The provisions of the 6th section of the 2nd part of the BewG are to be applied, i.e. §§ 157 to 203 BewG.
According to § 183 BewG, single-family houses are generally to be valued using the comparative value method. The material value method is only to be used if no comparative values are available. The tax office should use the comparative prices communicated by the expert committees or, if these are not suitable, other purchase price collections as a basis.
You can use the sales price estimated by your agent as a basis for your tax return. The decisive factor is the price at which comparable properties were sold on the day of death (reference date). Subsequent changes to the value are ignored.
Eva B. asks: “The future heiress (biological child) has been living in the granny flat in the family house for years. She will continue to live there in the future beyond the inheritance, that is foreseeable. Does inheritance tax also apply in this case?”
Hans-Joachim Beck: If children inherit the family home, the material tax exemption under Section 13 (1) No. 4 c ErbStG applies under certain conditions. According to this, the acquisition under inheritance tax law by the deceased’s children remains exempt from inheritance tax if the deceased used an apartment in the house for his own living purposes before the inheritance (or was prevented from using it for his own living purposes for compelling reasons). In addition, the apartment must be intended for use by the purchaser immediately for his own living purposes (so-called family home). In your case, these conditions will probably be met.
It is irrelevant whether the house is to be assessed as a one- or two-family house, since the regulation applies to both one- and two-family houses. However, the exemption only applies to the apartment occupied by the deceased and only if the living space of this apartment does not exceed 200 m². The granny flat and the part of the flat inhabited by the testator that exceeds 200 m² is taxable according to the general rules. The distribution of the value of the property is to be carried out according to the ratio of the living areas.
The exemption does not apply in the past if the purchaser no longer uses the family home himself within 10 years.
Silvia N. asks: “My 73-year-old mother owns and lives in a detached house. The purchase price five years ago was 300,000 euros. The house was only a year old then. In view of the current discussions about inheritance tax, my mother is now considering donating the property to me and my brother with a lifetime usufruct for her. Even then, however, they would probably face heavy tax burdens, which makes them and us doubt this idea. Which procedure is recommended for us and what are the advantages and disadvantages of different solutions?
Hans-Joachim Beck: In my opinion, it is advisable for tax reasons if your mother transfers the house to you while you are still alive and reserves a right of usufruct.
Irrespective of the current discussion, in my opinion it can be assumed that the value of such objects will continue to increase in the future – perhaps with a short break. It is therefore advisable to give away the property early on.
Since the personal allowances can be used again every ten years, given your mother’s age, it can be expected that assets can again be given away tax-free after the relevant ten years have elapsed.
Giving away under the reservation of usufruct is a very cheap way of transferring assets. Due to the usufruct, your mother retains the right to continue using the house as before. If necessary, she can even rent it out. For the calculation of gift tax, the capital value of the usufruct is deducted from the value of the property. The net present value of the usufruct is calculated by multiplying the annual rental value of the property by a certain factor, which results from the statistical life expectancy of the usufructuary. You can find the multiplier in the table under Section 14 BewG. For example, for a 73-year-old woman, it is 10.69. The capital value of the usufruct, which is to be deducted from the value of the property, therefore decreases with increasing age.
The right of usufruct expires when the usufructuary dies. However, this does not trigger any further inheritance tax, since the resulting increase in value of the property is only a so-called reflex.
It is advantageous if it is agreed in the gift contract that the donor pays the gift tax.
However, you should keep in mind that the tax advantage of the gift only benefits you and your brother, not your mother. Maybe you can repay her in one way or another.
Harald K. asks: My ex-wife and I own a condominium at 50/50 each. If I now want to transfer my 50 percent share to my son, is there anything to consider here under the new rules? What if I and my ex-wife completely transfer to our son 100%?
Hans-Joachim Beck: If you transfer your half of the condominium to your son, your son is entitled to the personal allowance of 400,000 euros. Only the excess value of half of the apartment is subject to gift tax.
Depending on how the apartment is used, you can also check whether it makes sense if you reserve a usufruct of the apartment. This would significantly reduce the gift tax value. It is not necessary for them to use the apartment personally because of the right of usufruct. You can also give or rent the apartment to your ex-wife free of charge.
If your wife also gives away half of the apartment that belongs to her to your son, the son is also entitled to the allowance of 400,000 euros for this donation. A child is entitled to the personal allowance according to § 16 ErbStG in relation to each of its parents.