Have you inherited a property with your sibling and are wondering about the tax liability? Inheritance tax for siblings poses significant financial risks due to low allowances and high tax rates.
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The topic briefly and concisely
Siblings have an inheritance tax allowance of only €20,000 and fall into the unfavourable tax class II with tax rates starting at 15%.
The calculation of inheritance tax is based on the property value determined by the tax office, which is often higher than the actual market value.
An independent market value appraisal can demonstrate a lower property value, allowing the tax burden to be legally reduced by thousands of euros.
This article explains precisely how to calculate inheritance tax for siblings regarding a property, which tax allowances and rates apply, and how a professional market value appraisal can reduce your tax liability by thousands of euros. We guide you step by step on how to proceed to pay only the absolutely necessary amount to the tax office and to optimally secure the inherited assets.
The Basics: Tax Classes and Allowances for Siblings
When siblings inherit a property, different tax rules apply compared to those for children or spouses. The Inheritance Tax and Gift Tax Act (ErbStG) categorizes heirs into three tax classes. Siblings, nieces and nephews fall into the less favorable Tax Class II. This classification has direct consequences for the amount of tax incurred.
The personal allowance for acquirers in Tax Class II is limited to only €20,000 per person. In comparison, spouses enjoy an allowance of €500,000 and children of €400,000. This low allowance of €20,000 is almost always exceeded when it comes to real estate assets, resulting in a high tax burden. Understanding these fundamental values is the first step in planning. Next, the specific tax rates of Tax Class II must be considered.
Accurately calculate the tax burden: Tax rates for tax class II
After deducting the allowance of €20,000, the remaining value of the property inheritance is taxed. The tax rates in tax class II are progressive, starting at 15%. They quickly rise with the value of the inheritance.
The tiers of tax rates are as follows:
Up to €75,000 taxable acquisition: 15%
Up to €300,000 taxable acquisition: 20%
Up to €600,000 taxable acquisition: 25%
Up to €6,000,000 taxable acquisition: 30%
Up to €13,000,000 taxable acquisition: 35%
An example illustrates the high burden: Two siblings inherit a house with a market value of €640,000. Each is entitled to a €320,000 share. After deducting the allowance of €20,000, €300,000 remains as a taxable acquisition. A tax rate of 20% is applied to this, resulting in an inheritance tax of €60,000 per sibling. Therefore, the correct determination of the market value is crucial. The basis for this calculation is always the value of the property as determined by the tax office.
Determining the Property Value Correctly: The Crucial Role of Market Value
The tax office determines the value of an inherited property for inheritance tax purposes using a standardised procedure. This valuation is often done broadly and without an on-site inspection, which frequently results in a value higher than the actual market value. Regional peculiarities or a need for refurbishment are often not taken into account.
However, legally you have the right to demonstrate a lower value (§ 198 BewG). This is done by providing a qualified market value report from an independent expert. Such a report analyses all factors influencing value, such as location, condition, structural damage, and fixtures. Suppose the tax office sets the value at €500,000, but a report demonstrates an actual value of €420,000 due to defects. This reduction of €80,000 can reduce the tax burden per sibling by €8,000. The role of an appraisal in inheritance is thus central to fair taxation. Besides contesting the value, there are other approaches to tax optimisation.
Tax Optimisation: Legal Strategies to Reduce Tax Burden
To reduce inheritance tax for siblings on a property, various legal strategies can be employed. Forward planning by the testator is most effective in this regard.
Here are four proven approaches:
Lifetime gifting: Testators can transfer assets tax-free every 10 years. Up to €400,000 can be gifted tax-free to children, thereby avoiding a later high inheritance tax among siblings. Find out more about the gift tax on real estate in our blog.
Proof of a lower market value: As mentioned previously, commissioning an expert report is the most direct method to correct an inflated valuation by the tax office and lower the assessment basis.
Deductions for estate liabilities: Costs for the funeral of the testator, for the opening of the will, or for the issuance of a certificate of inheritance can be deducted from the estate value. Debts burdening the property also reduce the taxable acquisition.
Will planning by the testator: The testator can stipulate in the will that one child inherits the property (with a €400,000 tax allowance) and the other child receives a corresponding cash legacy. This can significantly reduce the total tax burden.
If the tax assessment has already been issued, swift action is required.
Reviewing and Challenging Your Tax Assessment: How to Protect Your Rights
After the tax office has determined the value of the property, you will receive what is known as a determination notice. You can appeal this notice within one month. It is essential to adhere to this deadline, as otherwise the notice becomes legally binding. The appeal must be made in writing and should be well substantiated.
The best substantiation is a market value appraisal from a certified expert. This document provides the tax office with solid proof that the actual value of the property is lower than the roughly determined value. Are you uncertain whether the value assessed by the tax office is realistic? An initial assessment can help. With the Auctoa Inheritance Manager or our ImmoGPT chat, you can receive a free initial assessment of the property's value within minutes. This process is particularly important if you are part of an inheritance community and need a joint strategy.
Conclusion: Actively manage your tax burden through precise evaluation
The inheritance tax poses a significant financial burden for siblings inheriting a property. The low exemption amount of only €20,000 and the high tax rates in tax class II can quickly lead to demands amounting to several tens of thousands of euros. The key lever to reducing this burden is the market value of the property. Since the tax office's valuations are often too high, a proactive review is essential. An independent expert valuation is the most effective tool to set a fair value and only pay the legally owed tax. With the right valuation and strategic planning, you can effectively protect your inherited assets.
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Additional useful links
Bundesfinanzministerium provides comprehensive information on inheritance and gift tax.
Finanztip explains inheritance tax on real estate in a detailed article.
Statistisches Bundesamt (Destatis) provides a publication on inheritance and gift tax.
Statistisches Bundesamt (Destatis) offers a statistical report on inheritance and gift tax.
Bundesfinanzministerium publishes reports and opinions from the Scientific Advisory Board on inheritance tax.
Steuertipps.de informs about changes in real estate valuation for inheritance tax as of 2023.
Sparkasse offers a guide to inheritance tax.
FAQ
Which tax class applies to siblings for inheritance tax?
For siblings, tax class II of the Inheritance and Gift Tax Act applies. This class has a low tax exemption of €20,000 and higher tax rates than tax class I, which applies to spouses and children.
Can I challenge the value of my inherited property as determined by the tax office?
Yes, you can file an objection within a month after receiving the assessment notice. To be successful, you should submit an appraisal report from an independent expert that demonstrates a lower, realistic market value.
What happens if I inherit as part of an inheritance community with my brother or sister?
In an heir community, the property belongs to all heirs jointly. Each co-heir must individually tax their share of the inheritance, based on their personal allowance of €20,000. The heir community must agree on what happens to the property, such as selling, renting, or paying off a co-heir.
What expenses can I deduct from inheritance tax?
You can deduct liabilities from the value of the estate. These include the costs for the deceased's funeral, probate costs, appraisal fees, and any debts on the property. This reduces the tax assessment base.
Is a valuation worthwhile even for a property with a lower value?
An appraisal can also be worthwhile for properties whose value is only slightly above the tax-free allowance. Even a slight reduction in the market value can lead to a noticeable tax saving due to the high tax rates of 15% or 20%. A preliminary review by an expert is recommended.
Is there also land transfer tax in addition to inheritance tax?
No, inheritance tax does not usually apply to inheritances. However, this tax becomes due when an heir sells their share of the property to a third party or, under certain circumstances, to a co-heir.
