Have you inherited a property from your aunt or uncle? While the joy is great, an unexpectedly high tax demand often lurks, as the tax allowance for nieces and nephews is only €20,000. This article shows you how to legally reduce the tax burden by up to 43% through precise property valuation and smart planning.
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The topic briefly and concisely
Nieces and nephews only have a tax-free allowance of €20,000 in an inheritance and fall into the unfavourable tax category II.
Inheritance tax ranges from 15% to 43% of the property's value that exceeds the allowance.
A professional market value appraisal can correct the standardised (and often too high) valuation of the tax office, thereby directly reducing the tax burden.
Inheriting a property is a significant increase in wealth, yet for nieces and nephews, the joy can quickly be overshadowed by the reality of the German inheritance tax laws. Unlike direct children or spouses who benefit from allowances up to €500,000, the legislator grants you only an allowance of €20,000. With today's property values, this almost always results in a substantial tax burden. However, you are not helplessly subject to this. A thorough understanding of valuation rules and strategic decisions can drastically reduce your financial burden. We guide you through the crucial factors – from accurate valuation to legal tax-saving models.
Basics: Tax Class II and the allowance of €20,000
The Inheritance Tax and Gift Tax Act (ErbStG) categorises heirs into three tax classes, which determine the amount of tax-free allowances and tax rates. As a niece or nephew, you fall into Tax Class II. This specifically means you are entitled to a personal allowance of only €20,000, as stipulated in § 16 ErbStG.
This amount is in stark contrast to the allowances for close relatives in Tax Class I. Spouses can inherit assets worth €500,000 tax-free, and biological children up to €400,000. This discrepancy of over 95% often results in the allowance for nieces and nephews being quickly exceeded, especially with real estate assets. Everything exceeding this €20,000 must be taxed. Knowing how to calculate the exact tax burden and what to consider with an inherited property is therefore crucial for your financial planning.
Accurate valuation of the inherited property thus becomes a key factor in controlling the tax burden.
The Property Value: How the Tax Office Calculates and Where Your Leverage Lies
The amount of inheritance tax is directly dependent on the value of the property as determined by the tax office. Following a legal amendment in 2023, the tax assessment is more closely aligned with the actual market value, which often results in higher valuations. The tax office uses standardised methods for valuation, such as the comparative value, income value, or intrinsic value methods according to the Valuation Act (BewG).
However, these general valuations rarely consider individual peculiarities of a property, such as required renovations, structural defects, or an unfavourable location. Here is where your greatest opportunity for optimisation lies: you have the right to demonstrate a lower market value through an independent appraisal. A reduction of just 10% in value can already lower your tax burden by thousands of euros. A precise, data-driven market value appraisal is therefore not an expense, but an investment.
With a professional valuation from Auctoa, you ensure that you only pay the absolutely necessary amount of tax. Have the market value for the tax office determined by experts. This provides a solid, unassailable foundation for your tax return.
Calculation example: This is the actual tax burden for nieces and nephews
The abstract numbers quickly become tangible with a concrete example. Imagine you inherit a flat from your aunt, appraised at a market value of €420,000.
This is how your tax liability is calculated:
Determination of the taxable acquisition: Your personal allowance (€20,000) is deducted from the property's value (€420,000). This leaves €400,000, which must be taxed.
Application of the tax rate: According to § 19 ErbStG, a tax rate of 25% applies to a taxable acquisition between €300,001 and €600,000 in Tax Class II.
Calculation of inheritance tax: 25% of €400,000 results in a tax liability of €100,000.
This example shows that the tax burden can quickly amount to 20-25% of the property's value. Without liquid funds from the rest of the inheritance, this could force the sale of the property. With our inheritance tax calculator, you can quickly calculate your individual scenario. Knowing the exact figures is the first step towards developing an appropriate counter-strategy.
Strategy 1: Utilise gifts every 10 years to reduce taxes
One of the most effective legal methods to reduce future inheritance tax is gifting during one's lifetime. The law allows you to use the personal allowance of €20,000 for gifts from the same person in full every 10 years. If the testator plans ahead, they can transfer significant assets tax-free.
Suppose your aunt wants to transfer wealth to you over a period of 20 years. She could give you €20,000 today and another €20,000 in 10 years and one day. In this way, €40,000 would have been transferred tax-free, which would reduce the tax burden by at least €6,000 (15% of €40,000) in the event of inheritance. For real estate, this can be done by transferring co-ownership shares worth €20,000 every 10 years. This forward planning, while time-consuming, is a simple and effective way to minimise the inheritance tax on real estate.
This strategy is particularly effective when combined with other approaches, such as chain gifting.
Strategy 2: The chain gifting as an advanced option
An advanced but highly effective method is the so-called chain donation. Here, the high tax allowance of a person in tax class I (e.g., a child of the testator) is used as an 'intermediate station'. The testator first gifts the property to their own child (tax allowance €400,000), who then donates the property to their cousin (the niece/nephew of the original donor).
The decisive advantage: The second donation occurs between cousins, who also belong to tax class II and have a tax allowance of €20,000. The key lies in utilizing the high allowances in the first stage. It is crucial that the first recipient (the child) must not be legally obliged to pass it on. The further donation must be a free-willed decision; otherwise, the tax office could consider it an abuse of arrangement. This method requires absolute trust and, due to its complexity, should only be implemented with professional advice. However, it demonstrates the legal ways to legally avoid inheritance tax.
In addition to donations, there are other tools that can affect the value of a property and thus the amount of tax burden.
Strategy 3: Use Usufruct and Right of Residence to Reduce Value
Another way to reduce the taxable value of a property is by imposing a usufruct or right of residence. If the donor reserves such a right when transferring the property during their lifetime, it reduces the capital value of the gift. The tax office deducts the value of this right from the market value of the property, thereby lowering the tax base.
The value of the usufruct depends on the statistical life expectancy of the entitled person and the potential rental value of the property. For a 65-year-old man, the deduction in value could, for example, amount to over 30% of the property's value. The following points are relevant:
Usufruct: The entitled person can not only live in the property but also rent it out and keep the income.
Right of residence: This right only allows for the personal use of the property or parts of it.
Valuation: The capital value is calculated using mortality tables from the Federal Statistical Office.
These instruments are complex but an important tool. An accurate inheritance valuation helps to precisely quantify all depreciative factors and assert them with the tax office.
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The inheritance tax for nieces and nephews represents a significant financial hurdle due to the low tax-free allowance of €20,000, often necessitating the sale of the inherited property. It's not uncommon for the tax burden to exceed 25% of the property's value. The key to minimising this burden lies in two areas: proactive, long-term planning by the testator and an accurate, professional property valuation by the heir.
Strategies such as gifts every 10 years or granting a usufruct can significantly reduce the tax burden. However, the most important and direct lever for you as an heir is proving the correct market value. Do not rely on the tax office's general estimates. An independent appraisal that considers all devaluing factors is the most effective defence against an excessive tax demand. With the right strategy and a data-driven valuation from Auctoa, you can turn an impending tax trap into secured wealth. Act now to fully protect the value of your inheritance.
Additional useful links
Das Bundesfinanzministerium provides comprehensive information on inheritance and gift tax.
Das Statistische Bundesamt (Destatis) offers a detailed publication on inheritance and gift tax.
Das Statistische Bundesamt (Destatis) informs in a press release about current developments in inheritance tax.
Stiftung Warentest explains how tax offices determine the market value of properties.
Deutschlandfunk sheds light on the inheritance tax allowance for heirs in 2023.
Tagesschau provides an article on real estate, inheritance, and the taxes associated with them.
Volksbank Raiffeisenbanken informs about inheritance tax and relevant aspects for private customers.
FAQ
What happens if I'm unable to pay the inheritance tax immediately?
If you are unable to pay the inheritance tax immediately, for example, because there are no liquid assets available, you can apply for deferral at the tax office. For rented properties, the tax can be deferred interest-free for up to ten years if a sale would be necessary to pay the tax. However, this is at the discretion of the tax office.
Can I deduct costs from the inherited property value?
Yes, you can deduct certain costs from the inheritance before the tax is calculated. This includes the costs for the deceased's funeral, the costs for a property valuation, and any debts associated with the property (e.g., a mortgage).
Does it make a difference if the inherited property is rented out?
Yes. For rented residential properties, a valuation reduction of 10% is granted for inheritance tax purposes. This means that only 90% of the actual market value is used to calculate the tax. This does not apply to properties that are owner-occupied or used commercially.
How quickly do I need to report the inheritance to the tax office?
You must notify the relevant tax office in writing, without a formal requirement, of an inheritance within three months of becoming aware of it. The tax office will then assess whether an inheritance tax declaration is necessary and, if so, request it from you.
What is the difference between inheritance tax and gift tax?
Legally, there is hardly any difference; the allowances and tax rates are identical. The main difference is the timing of the transfer: inheritance tax is due on death, while gift tax applies to transfers during one's lifetime. The great advantage of gifting is that the allowances can be used afresh every 10 years.
Is an appraisal worthwhile even for a property with low value?
A valuation report is always worthwhile when there is reason to believe that the standardised assessment by the tax office is too high. Even for a property worth €100,000, a reduction in value by €15,000 through an appraisal can mean a tax saving of €3,000 (20% of €15,000), which often exceeds the cost of the report.
