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Inheritance tax allowance for property niece nephew
Have you inherited a property from your aunt or uncle? While the joy is great, there is often an unexpectedly high tax demand, as the 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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Nieces and nephews only have a tax-free allowance of €20,000 when inheriting and fall into the disadvantageous tax class II.
The inheritance tax ranges from 15% to 43% of the property's value that exceeds the exemption limit.
A professional traffic value appraisal can correct the standardized (and often too high) valuation of the tax office, thereby directly reducing the tax burden.
Inheriting property is a significant increase in wealth, but for nieces and nephews, the joy can quickly be overshadowed by the reality of the German inheritance tax law. Unlike direct children or spouses who benefit from allowances of up to €500,000, the legislator grants you only an allowance of €20,000. With today's property values, this almost always leads to a substantial tax burden. However, you are not at the mercy of this situation. 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.
The Inheritance and Gift Tax Act (ErbStG) categorises heirs into three tax classes, which determine the allowances and tax rates. As a niece or nephew, you belong to Tax Class II. This specifically means that 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% means that, especially for property assets, the allowance for nieces and nephews is quickly exceeded. Anything above 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.
The correct valuation of the inherited property thus becomes the key lever to control the tax burden.
The amount of inheritance tax directly depends on the value of the property as determined by the tax office. Since a change in the law in 2023, the tax assessment is more aligned with the actual market value, which often leads to higher valuations. The tax office uses standardized methods for the valuation, such as the comparable value, income value, or replacement cost methods in accordance with the Valuation Act (BewG).
However, these blanket valuations rarely account for individual characteristics of a property, such as pending renovation needs, construction defects, or an unfavourable location. This is your biggest opportunity for optimisation: 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. Let experts determine the market value for the tax office. This creates a solid, indisputable basis for your tax return.
The abstract numbers become tangible quickly with a concrete example. Let's assume you inherit a flat as a nephew from your aunt, which has a market value estimated at €420,000.
This is how your tax burden is calculated:
Determination of taxable acquisition: Your personal allowance (€20,000) is deducted from the property value (€420,000). This leaves €400,000 that needs to be taxed.
Application of the tax rate: According to § 19 ErbStG, a tax rate of 25% applies for 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 demand of €100,000.
This example shows that the tax burden can quickly amount to 20-25% of the property's value. Without liquid assets from the rest of the inheritance, this can 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.
One of the most effective legal methods for reducing future inheritance tax is lifetime gifting. The law permits the full use of the personal allowance of €20,000 for gifts from the same person every 10 years. If the testator plans early, they can transfer significant assets tax-free in this way.
Suppose your aunt wants to give you wealth over a period of 20 years. She could gift you €20,000 today and another €20,000 in 10 years and one day. Thus, €40,000 would already be transferred tax-free, which would reduce the tax burden by at least €6,000 (15% of €40,000) in the event of inheritance. With real estate, this can be done by transferring co-ownership shares worth €20,000 every 10 years. Although this forward planning takes time, it is a simple and effective way to minimise the inheritance tax on property.
This strategy is particularly effective when combined with other approaches such as chain gifting.
An advanced, yet very effective method is the so-called chain gifting. In this case, the high tax-free allowance of a person in tax class I (e.g. a child of the deceased) is used as an 'intermediate station'. The testator first gifts the property to their own child (tax-free allowance of €400,000), who then gifts the property on to their cousin (the niece/nephew of the original donor).
The decisive advantage: the second gift occurs between cousins, who also belong to tax class II and have a tax-free allowance of €20,000. The key is to utilise the high tax-free allowances in the first stage. It is important that the initial recipient (the child) must not be legally obliged to pass on the gift. The further gifting must be done of free will, otherwise, the tax office might assume tax avoidance. This method requires absolute trust and should only be implemented with professional advice due to its complexity. However, it demonstrates the legal ways available to legally bypass inheritance tax.
In addition to gifts, there are other instruments that can influence the value of a property and thus the tax burden.
Another way to reduce the taxable value of a property is by encumbering it with a usufruct or right of residence. If the donor reserves such a right during a lifetime transfer, it reduces the capital value of the gift. The tax office deducts the value of this right from the property's market value, thereby lowering the tax assessment basis.
The value of the usufruct depends on the statistical life expectancy of the beneficiary and the potential rental value of the property. For a 65-year-old man, the value deduction can amount to over 30% of the property's value. The following points are relevant in this context:
Usufruct: The beneficiary may not only live in the property but also rent it out and retain the income.
Right of residence: This right only allows for the personal use of the property or parts thereof.
Valuation: The capital value is calculated using life tables from the Federal Statistical Office.
These instruments are complex but an important tool. A precise inheritance appraisal helps to accurately quantify all value-reducing factors and assert them with the tax office.
The inheritance tax for nieces and nephews poses a significant financial hurdle due to the low allowance of €20,000, often forcing the sale of the inherited property. A tax burden of over 25% of the property's value is not uncommon. The key to minimizing this burden lies in two areas: proactive, long-term planning by the testator and precise, professional property valuation by the heir.
Strategies such as gifts every 10 years or granting usufruct can significantly reduce the tax burden. However, the most important and direct lever for you as an heir is proof of the correct market value. Do not rely on the broad estimates provided by the tax office. An independent appraisal that considers all value-reducing factors is the most effective defense against an excessive tax demand. With the right strategy and a data-driven valuation from Auctoa, you transform a looming tax trap into secured wealth. Act now to fully protect the value of your inheritance.
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 real estate.
Deutschlandfunk highlights the inheritance tax allowance for heirs in 2023.
Tagesschau provides an article on real estate, inheritance, and the associated taxes.
Volksbank Raiffeisenbanken provides information on inheritance tax and relevant aspects for private customers.
What happens if I can't pay the inheritance tax immediately?
If you can't pay the inheritance tax immediately, for example because there are no liquid assets available, you can apply for a deferral from 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's value?
Yes, you can deduct certain costs from the inheritance before the tax is calculated. These include the costs for the deceased's funeral, the costs of a valuation report for the property, as well as any debts on the property (e.g. a mortgage).
Does it make a difference if the inherited property is rented out?
Yes. For rented residential properties, a 10% valuation discount is granted for inheritance tax purposes. This means only 90% of the actual market value is used to calculate the tax. This does not apply to owner-occupied or commercially used properties.
How soon must I report the inheritance to the tax office?
You must inform the relevant tax office in writing and without formality within three months of becoming aware of the inheritance. The tax office will then check whether an inheritance tax declaration is necessary and will request it if needed.
What is the difference between inheritance 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 upon a death, while gift tax applies to transfers during the donor’s lifetime. The major advantage of gifting is that the allowances can be used anew every 10 years.
Is it worth getting a valuation even for a low-value property?
A valuation is always worthwhile if there is reason to believe that the tax office's standard assessment is too high. Even for a property valued at €100,000, a reduction of €15,000 through a valuation can result in a tax saving of €3,000 (20% of €15,000), which often exceeds the cost of the valuation.
