Inheriting a property is often associated with a significant tax demand from the tax office. But did you know that inheritance tax on properties can be legally avoided or at least drastically reduced? This article presents seven effective strategies to help you secure your inherited property instead of having to share it with the taxman.
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The topic briefly and concisely
Make use of the personal allowances (e.g., €500,000 for spouses, €400,000 for children) every ten years through lifetime gifts to gradually reduce the tax burden to zero.
Maintain control and reduce the taxable value of a property by gifting it while securing a lifelong usufructuary or residential right.
Demonstrate to the tax office a realistic, often lower property value through a professional market value appraisal to directly reduce the tax base.
When it comes to transferring property to the next generation, the question of inheritance tax inevitably arises. The legal requirements are complex, and the financial burdens can quickly diminish an inheritance. Many property owners and their heirs fear that a significant portion of the wealth – up to 50% of the property's value – might go to the tax authorities. However, with proactive planning and the right knowledge, the tax burden can be significantly reduced. In this guide, we present to you, as your digital companion for property valuation, the key legal methods, from utilizing tax allowances to lifetime gifts and the strategic importance of an accurate market value assessment. This way, you can effectively protect your wealth.
The Foundation: Effectively Utilize Tax Classes and Allowances
The amount of inheritance tax depends on two factors: the degree of kinship and the value of the property. The law divides heirs into three tax classes, which determine allowances and tax rates. Spouses and registered partners (Tax Class I) benefit from the highest allowance of 500,000 euros. Children are entitled to 400,000 euros, while grandchildren can inherit 200,000 euros tax-free. For siblings, nieces, and nephews (Tax Class II), the allowance drastically reduces to only 20,000 euros. Any amount exceeding these thresholds is taxed at rates ranging from 7% to 50%. Therefore, an accurate valuation of the property is the first step in correctly assessing the potential tax liability. Only with this knowledge can the following strategies be fully effective.
Strategy 1: Transfer assets early through lifetime gifting
Why wait until inheritance when you can set the course today? A lifetime gift is one of the most effective methods to legally avoid inheritance tax. The clever part is the 10-year rule. Every ten years, personal allowances can be fully utilised again. A parent can therefore transfer assets worth 400,000 euros to their child tax-free every ten years. For a property worth 800,000 euros, two gifts ten years apart can reduce the tax burden to zero. This approach offers significant advantages:
Utilisation of allowances every 10 years.
Reduction of the future estate value and thus the tax progression.
Ordered and planned transfer of wealth to the next generation.
Reduction of potential compulsory share claims by other heirs.
Early planning is crucial here, as the clock starts ticking from the moment of the gift. Learn more about the details in our article on gift tax on real estate. But what if you want to transfer the property and still use it?
Strategy 2: Secure Usage Rights through Usufruct and Right of Residence
Transfer the property to the children already, but continue collecting the rental income or live in it yourself? This is exactly what the reservation of a usufruct or residential right allows. In the case of a gift with a usufruct reservation, the recipient becomes the legal owner, but the giver retains the comprehensive right of use. This usufruct has a capital value that is deducted from the property's value, thereby reducing the basis for calculating the gift tax. The value of the usufruct is calculated based on the statistical life expectancy of the giver and potential rental income, potentially reducing the tax burden by 30% to 50%. A 65-year-old giver can significantly reduce the taxable value of a property in this way. Our inheritance tax calculator helps you calculate this potential. For owner-occupied homes, there is an even more direct solution.
Strategy 3: Inherit the family home tax-free to spouses or children
Legislation provides special protection for the family home. The so-called family home can be inherited completely tax-free under certain conditions. For the surviving spouse or registered partner, inheritance tax on the jointly occupied property is completely waived if they continue to live in it for at least ten more years. If they cease using it before then, tax is applied retroactively unless they are prevented from living there for compelling reasons (e.g., need for care). Children can also inherit the family home tax-free, but there is a limit to the living area of 200 square metres. Anything beyond this is taxed proportionately. They too must move in without delay and live there for ten years. After this period, a tax-free sale is possible, although the speculation period for the sale must be observed. This regulation is a powerful tool but applies only in very specific circumstances.
Strategy 4: Maximise Allowances through Chain Gifts
What to do if the value of a property exceeds the inheritance tax allowances of direct heirs? In this case, the chain gifting method can be a legal solution to distribute the tax burden. Instead of grandparents gifting a property directly to their grandchildren (allowance €200,000), they can first transfer it to their own children (allowance €400,000). The child can then re-gift the property or parts of it to the grandchild, using another allowance. This way, a gift from grandfather to grandchild via the father can move a total of €800,000 tax-free (€400,000 grandfather -> father, €400,000 father -> child). It is important that there is no legal obligation to pass on the gift in between and that a certain amount of time passes. This method is particularly useful for bypassing the low allowances for nieces and nephews. An alternative to gifting could be selling.
Strategy 5: Sell property to relatives instead of bequeathing it
Sometimes selling the property to the next generation is the most fiscally and economically sensible option. A sale does not trigger inheritance or gift tax, but potentially capital gains tax, which is waived after a holding period of ten years. The sale price can also be below the market value. Such a sale below value to relatives is considered by the tax office as a mixed gift. The difference between the purchase price and the market value is treated as a gift, which can often be covered by personal allowances. This strategy has two advantages: The parents gain liquidity from the sale, and the children acquire the property at a favourable price. However, for all these models, one point is non-negotiable: the correct value of the property.
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Every calculation of inheritance tax starts with the value of the property. The tax office often uses standardised methods for valuation, which do not always reflect the actual market value and tend to be too high. A lower property value means lower tax. You have the right to demonstrate a lower value through a qualified market value appraisal. Such an appraisal takes into account individual characteristics such as structural damage, a backlog of repairs, or an unfavourable location, which can reduce the value by 15-20%. The role of the appraisal in inheritance cases is therefore crucial. An expert appraisal by professionals such as Auctoa provides the necessary legal assurance to the tax office. The following reasons emphasise its necessity:
It establishes a realistic and often lower basis for assessment.
It serves as recognised evidence for submission to the tax office.
It reveals value-reducing factors that standard procedures ignore.
It is the basis for the correct calculation of usufruct rights.
It prevents conflicts among co-heirs over the property's value.
With our Auctoa Inheritance Manager or an initial exchange in the ImmoGPT chat, you will quickly receive an initial assessment and can plan the next steps.
Conclusion: Proactive planning beats reactive tax payment
How long do I have to live in the inherited family home to qualify for tax exemption?
To take advantage of the full tax exemption for the family home, you must, as an heir (spouse or child), reside in the property yourself for a period of ten years following the inheritance. Ceasing to occupy it before the period ends usually results in retrospective taxation.
What value does the tax office assign to an inherited property?
The tax office generally determines the value of a property using standardised valuation methods (e.g., comparative value or real value methods). These values can be higher than the actual market value. However, you have the right to prove a lower market value with an expert report.
What is the advantage of usufruct over a mere right of residence?
Usufruct is more comprehensive than the right of residence. While the right of residence only permits living in the property, usufruct additionally allows for economic use, such as renting it out and retaining rental income. Both reduce the taxable value of the property.
Can I avoid inheritance tax by selling the property?
Yes, selling to future heirs is an option. A sale does not trigger inheritance tax. If the property is sold below market value, the difference is considered a gift, which can often be covered by tax allowances. This also provides liquidity to the sellers.
Does chain gifting work with non-relatives?
Theoretically yes, but it's usually not tax-efficient. The tax allowances for non-relatives (Tax Class III) are very low at 20,000 Euros, and the tax rates range from 30% to 50%. This strategy is particularly effective within the family (Tax Class I).
What is a super legacy and does it help with inheritance tax?
A super legacy is a provision within a Berlin will. It gives the surviving spouse the flexibility to pass part of the inheritance to the children in a tax-optimised manner, making use of their allowances upon the first inheritance to reduce the family's overall tax burden.
Additional useful links
Destatis provides a press release on the revenue from inheritance and gift tax in the first half of 2024.
Destatis offers publications on the subject of inheritance tax.
The Federal Ministry of Finance provides official information on inheritance and gift tax.
The Tagesschau delivers an article about inheritance and gift tax.
Deutschlandfunk offers a piece about inheritance tax and tax allowances for heirs in 2023.
The Zeit publishes an article on record revenues from inheritance and gift tax in Germany in 2023.
Haufe provides an article on inherited and gifted wealth in 2023.
Destatis provides a press release on the revenue from inheritance and gift tax in the first half of 2023.
FAQ
How long do I have to stay in the inherited family home to qualify for the tax exemption?
To take full advantage of the tax exemption for the family home, as an heir (spouse or child), you must personally occupy the property for a period of ten years following the inheritance. If you cease to use it before this period ends, it usually results in retrospective taxation.
What value does the tax office assign to an inherited property?
The tax office usually determines the value of a property through standardized valuation methods (e.g., comparative value or intrinsic value methods). These values may exceed the actual market value. However, you have the right to demonstrate a lower market value through an expert report.
What is the advantage of usufruct over a simple right of residence?
The usufruct is more comprehensive than the right of residence. While the right of residence only permits inhabiting the property, the usufruct also allows for economic use, such as renting out the property and retaining the rental income. Both reduce the taxable value of the property.
Can I avoid inheritance tax by selling the property?
Yes, selling to future heirs is an option. A sale does not trigger inheritance tax. If the property is sold below market value, the difference is considered a gift, which can often be covered by exemptions. This also provides the sellers with liquidity.
Does chain gifting also work with non-relatives?
Theoretically yes, but it is usually not advisable from a tax perspective. The allowances for unrelated individuals (tax class III) are very low at 20,000 euros, and the tax rates are very high at 30% to 50%. This strategy is most effective within the family (tax class I).
What is a super legacy and does it help with inheritance tax?
A super-legacy is a design within the framework of a Berlin Will. It gives the surviving spouse the flexibility to pass parts of the inheritance on to the children in a tax-optimised way, making use of their tax allowances in the first instance of inheritance and thus reducing the overall tax burden on the family.
