Are you considering gifting a property but worried about a hefty tax demand from HMRC? The key to saving on taxes lies in accurate valuation. Learn how to determine the value of a gift correctly and avoid pitfalls.
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The topic briefly and concisely
The tax office determines the value of a property gift using standardised procedures, which often leads to an overvaluation of 15-20%.
You can demonstrate a lower, realistic market value with an independent expert assessment and thereby reduce the tax burden.
Personal allowances (e.g. €400,000 for children) can be utilised every 10 years and combined with value reductions such as usufruct.
Gifting a property is a significant step, often accompanied by concerns about high gift tax. The tax office determines the value of your property using standardized methods, which often overestimate the market value by 15-20%. Therefore, a precise understanding of these valuation mechanisms is not a luxury but a financial necessity. This article shows you how the value of a gift is determined and how you can significantly reduce your tax burden using data-driven methods.
The central role of the tax office in property valuation
After each gift, the certifying notary informs the relevant tax office within two weeks. The office then initiates the assessment of the gift tax. The authority determines the property value according to the guidelines of the Valuation Act (BewG), often through a standardised mass procedure.
This standard procedure typically does not take into account individual features such as a backlog in renovations or construction defects. This often results in a tax overvaluation of up to 20%. The Valuation Act, particularly sections 176 ff. BewG, serves as the legal basis for the tax office. An accurate market value assessment for the tax office is therefore crucial.
However, this standardised assessment is not final and can be adjusted with the correct tools, paving the way for the application of more specific valuation methods.
Correctly determining value: These 3 methods are used by the tax office
The Valuation Act prescribes three official methods of valuation, the application of which depends on the type of property. The choice of method can have a direct impact of up to 30% on the determined value.
The following methods are used for valuation:
Comparative Value Method (§ 183 BewG): This method is primarily used for condominiums and single or two-family houses in common locations. The tax office compares selling prices of similar properties from the last 12 months.
Income Value Method (§§ 184-188 BewG): For rented properties such as apartment buildings or commercial objects, the future income counts. The value is derived from the sustainably achievable rental income, reduced by management costs.
Asset Value Method (§§ 189-191 BewG): If there are no comparable objects, the tax office uses this method. It adds up the standard land value and the building production costs, minus a depreciation due to age.
A professional valuation by experts can validate the most advantageous method for you. Knowing these methods is the first step towards understanding how the final tax burden is determined.
Optimising Tax Burden: The Direct Impact of Market Value
The determined market value is the direct calculation basis for the gift tax. A value that is €50,000 lower can reduce your tax liability by over €7,500, depending on the tax class. Fortunately, the Inheritance and Gift Tax Act (ErbStG) grants personal allowances that can be used again every 10 years.
The amount of allowances depends on the degree of relationship:
Spouses & Civil Partners: €500,000
Children & Stepchildren: €400,000
Grandchildren: €200,000
Parents and Grandparents (in case of inheritance): €100,000
All other persons (e.g. siblings, friends): €20,000
For a house valued at €500,000 that is gifted to a child, €400,000 is tax-free. Only the remaining €100,000 is subject to tax, which amounts to €7,700 in tax class I. You can quickly calculate your estimated burden with our inheritance tax calculator. Since the valuation by the tax office is often too high, the question arises as to how this can be effectively challenged.
Challenging a Tax Office Assessment: The Power of a Counter-Expert Opinion
You are not at the mercy of the tax office's assessment. According to § 198 BewG, you have the right to prove a lower market value through an expert valuation. Such a report can reduce the tax burden by an average of 15-25%.
A qualified appraisal takes into account value-reducing factors ignored by the tax office, such as:
Necessary renovations (e.g. roof, heating)
Construction defects or hidden damages
Encumbrances in the land register (e.g. rights of way)
Unfavourable layouts or locations
A court-recognised expert can determine a value up to 30% lower. A data-driven analysis, such as that offered by Auctoa, provides you with a strong basis for argument. Try out our ImmoGPT for free now to get an initial assessment and examine the need for an appraisal. A well-founded appraisal in cases of inheritance is often the crucial lever. In addition to an appraisal, there are other strategic ways to reduce the taxable value.
Strategically Utilize Depreciation through Usufruct and Right of Residence
Another effective method to reduce the tax burden is registering a usufruct or right of residence. If the donor retains such a right, its capitalised value is deducted from the market value of the property. This deduction can reduce the taxable value by 20-50%, depending on the age of the beneficiary.
The value of the right is calculated based on statistical life expectancy and potential annual rent. For a 65-year-old donor and an annual net rent of €12,000, the value of the right of residence can quickly exceed €130,000. This amount is deducted directly from the property value before the tax allowance is applied. In this way, you can transfer an inherited house to children tax-free. This strategic arrangement requires precise calculation to fully exploit the benefits.
Conclusion: Proactive assessment as the key to tax optimisation
The determination of the value of a gift is a procedural marathon, not a sprint. The value set by the tax office is merely an initial suggestion, which often exceeds the real market value by more than 15%. Your strongest tool is proving a lower fair market value through a qualified appraisal that takes individual defects into account.
By strategically using allowances, which can be fully utilised every 10 years, and reducing the value through usufruct or right of residence, thousands of euros in taxes can be saved. A proactive and data-driven valuation is the key to a tax-optimised gift.
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Additional useful links
The Federal Ministry of Finance offers a comprehensive overview of inheritance and gift tax.
Wikipedia provides a detailed article on inheritance tax in Germany.
You can find an informative article about the required value, which is relevant for the valuation of assets under inheritance tax, on Wikipedia.
Wikipedia offers an article on the Inheritance and Gift Tax Act.
The Federal Ministry of Finance explains the application of regulations for the valuation of real estate in the context of inheritance and gift tax.
The full text of the Inheritance and Gift Tax Act (ErbStG) can be found on Gesetze im Internet.
Destatis (Federal Statistical Office) provides comprehensive information on construction prices and real estate price indices.
Current tables on house and land prices are also available at Destatis.
BORIS-D is the central information platform of the expert committees for property values, providing standard land values and other property market data.
FAQ
Who determines the value of a gift?
First, the responsible tax office determines the value of the property based on standardized valuation methods (comparative value, income value, or real value methods) according to the Valuation Act (BewG). However, this value can be contested by an expert opinion commissioned by you.
How can I reduce the gift tax?
You can reduce the tax burden through several measures: make use of personal allowances every 10 years, demonstrate a lower property value through an appraisal, and reduce the value by registering rights such as usufruct or residential rights.
Which valuation method is right for my property?
It depends on the type of property. For owner-occupied houses and apartments, the comparative value method is usually applied. For rented properties, the income approach is used, and for all other specialized properties, the tangible value method is employed.
Is it always worthwhile to get an appraisal for determining value?
An appraisal is worthwhile if the value estimated by the tax office is higher than the actual market value, and the potential tax savings exceed the costs of the appraisal (approximately 0.5% to 1.5% of the market value). This is particularly the case for older or properties in need of renovation.
What is the difference between market value and standard value?
The market value (or common value) is the current market value of the property and the basis for the gift tax since 2009. The standard value is an outdated, very low value that is only used for property tax and no longer plays a role in the gift tax.
What are the tax rates for gift tax?
The tax rates depend on the tax class and the amount of the taxable acquisition (after deduction of the allowance). They start at 7% in tax class I (close relatives) and can go up to 50% in tax class III (non-relatives).
