Avoidance of German inheritance tax on domestic real estate when the family moves abroad

According to the previously prevailing view, a property located in Germany that was transferred in the event of an inheritance was even subject to German inheritance tax if both testator and heir lived abroad.

For these cases, Germany´s highest tax court BFH has now opened up an interesting design option with its current judgment (4 K 174/16), allowing in individual cases that the transfer of German real estate is not subject to German inheritance tax.

Vermeidung deutscher Erbschaftsteuer auf inländische Immobilien bei Wegzug der Familie ins Ausland

Required is that the property is not transferred to an heir, but to a legatee.

The heir enters directly into the legal position of the deceased testator. At the time of death, he becomes the owner of the deceased’s property without any further action.

This is different in the case of a legacy. The legatee only has a claim against the heir to handover real estate that was left to him as a legacy.

He does not become the immediate owner  upon inheritance, but only when it is handed over to him.

This subtle difference means that the claim for surrender – unlike the direct inheritance of the property – is not covered by the  catalog of Section 121 BewG, which defines domestic assets.

If additionally both testator and legatee live abroad and don`t have a domicile or habitual residence in Germany, then there is no domestic connection required for German inheritance taxation.

Insofar as German nationals are involved, it should also be noted that in the event of inheritance they must have already been abroad for at least 5 years in order not to fall under the extended unlimited inheritance taxation. In case of a relocation to low-tax countries, this 5-year period may be extended to 10 years.

If testamentary provisions taken follow foreign law, it must always be checked whether the provision made corresponds to the German understanding of a legacy, i.e. whether it only justifies a claim for surrender.

Frequently legal systems open the  possibility – Germany does so for example  – to designate someone as heir and legatee at the same time. Certain assets are assigned to the heir as a legacy, regardless of his inheritance quota.

Skillfully drafted  wills can, depending on the situation, open new possibilities to transfer German real estate in the event of an inheritance without being subject to German inheritance tax.

Munich tax advisors Alexia Huber & Partner Steuerberatungsgesellschaft mbB provide comprehensive advice on inheritance and gift tax issues. This includes estate planning, anticipated gifts, model calculations with tax burden comparisons, tax calculations of property values ​and the preparation of gift and inheritance tax returns.

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