Are you an expat looking to settle down in Germany? Even if you’re not a citizen, you’ll want to make sure you know when German inheritance tax and German inheritance law applies to non-residents, foreigners and expatriates alike. Use this guide to help you understand the nitty gritty on the rules, regulations, and exceptions to German inheritance taxes.
In many countries inheritance tax is calculated over the estate of the deceased, before it’s divided between the heirs. However, in Germany they tax the beneficiary for the assets they receive - although there are some exceptions - which means it can get complicated quite fast.
German Inheritance Tax and Gift Law, locally called Erbschafts- und Schenkungssteuergesetz or ErbStG, are laws that require a tax on the beneficiary or heir of any transferred property at death of another. This can include transfers such as family or spousal inheritances, a specific bequest, or a property received through a trust.
Under the German Inheritance Tax and Gift Law, transfers are only taxed if:
- the beneficiary is a German taxpayer (Steuer-Inländer)
- the deceased was a German taxpayer (Steuer-Inländer)
- there are certain assets located in Germany, even if neither the beneficiary nor deceased are/were German taxpayers
A German taxpayer includes those who own property or have a temporary residence or “habitual abode” of 6 months or longer within the country each year. In addition, if either is a German national and has resided in Germany in the last 5 years, they are still considered a German taxpayer.
If neither person is a taxpayer, then something called situs taxation (literally, place of taxation) comes into play if certain types of assets are on German soil. There’s a whole list of assets and properties in which inheritance tax still applies. If you believe this may be relevant to your situation, you can find a full list of German situs taxation assets in the link to source 1 below.
There’s a large difference between residents and non-residents when it comes to paying inheritance tax. If a beneficiary lives outside of Germany, the German tax code taxes both the estate and the beneficiary. For non-residents, there are also fewer tax exemptions available. Overall, non-residents tend to be at a disadvantage with respect to inheritance tax. For example, someone qualifying as a non-resident is granted only a €2,000 exemption on assets, whereas a resident can be granted between €200,000 and €500,000, depending on their relationship to the deceased.
(Source 1 06 Dec 2017)
When there’s no will, German inheritance law requires immediate ownership of property by deceased’s relatives according to the prescribed orders of family succession. The inheriting family succession orders (Ordnung) in Germany are:
|Succession Order||Relationship to deceased|
|1st||children of the deceased and their descendants|
|2nd||parents of the deceased and their descendants|
|3rd||grandparents of the deceased and their descendants|
|4th||great-grandparents of the deceased and their descendants|
Spouses - or registered same-sex partners - are considered separate from the succession orders, and the matrimonial property regime determines the right of inheritance. German inheritance law (Pflichtteil) also allows close family members a right to claim half of what they would inherited from the estate, even if a will excluded them.
The table below shows how German law splits up property among inheriting family members:
|Person legally entitled to the property in Germany||Distribution of estate if other descendants survive|
|Spouse||50% of estate if children survive; 75% if parents, siblings or grandparents survive|
|1 child||50% of estate value|
|2 children||50% of estate value, split equally among children|
|3 children||50% of estate value, split equally among children|
The value of the inherited German property is assessed on the fair market value (FMV) at the time of the death. In order to assess which amount of tax a beneficiary has to pay, Germany divides all beneficiaries in different classes or categories. There are 3 different classes in which a beneficiary can be placed, and they depend on the family relation between the deceased and the beneficiary.
The different classes that a beneficiary can belong to, for tax purposes, are:
|Class||Family relation to the deceased|
|l||Spouse, registered same-sex partner, children, parents|
|ll||Divorced spouse, sibling, nieces or nephew, step-parent, parent-in-law, daughter or son-in-law|
|lll||Any other person|
There are several allowances and tax exemptions which help you reduce the amount of tax you have to pay on the inheritance. However, for most of these the amount depends on the familial relationship to the deceased. We will discuss this in more detail, below.
(Source 08 December 2017)
The beneficiaries of the inheritance are taxed according to their taxable class. The tax is calculated over their net inheritance, which is the amount that is left over after any allowances and exemptions have been taken off.
This is the percentage of the tax rate in every class:
|Value of personal inheritanceUp to amount (EUR)||Class lIn %||Class llIn %||Class lllIn %|
|More than 26 million||30||43||50|
(Source 08 December 2017)
Allowances, or inheritances that are exempted from taxes, vary by the relationship of the beneficiary. In addition to the general allowances, which you can find in the table below, there is a special, additional allowance for spouses and children. Spouses are granted up to €256,000 and children age 27 or younger are additionally allowed up to €52,000, provided that they are not entitled to any of the deceased’s pension payments that aren’t subject to inheritance tax in Germany.
|Relationship to the deceased||2017 tax-free allowance in Germany|
|Spouse or registered same-sex partner||€500,000|
|Niece or nephew||€20,000|
Germany’s laws merge both inheritances and gifts together under the same standards, the German Inheritance Tax and Gift Law or the Erbschafts- und Schenkungssteuergesetz. In other words, all of the same rules for inheritances apply for receiving gifts.
There are a few types of properties that are exempt from German inheritance taxes, including:
- Community or jointly-owned property
- A family home of a surviving spouse or partner, provided it’ll be used as the family home for the next 10 years, and it’s located in the EC or EEA
- Numerous business assets
- German-based pension plans
- Household and personal effects up to €41,000
- Moveables (for example, personal jewelry) up to €12,000
- Real estate that has a public interest
- Collections of art, scientific interest or cultural assets from 60% to 100%, depending on tax class
- Gifts to churches or charities
The total exempted amount of these property or assets will vary and are generally dependent upon the beneficiary’s tax class.
(Source 08 December 2017)
There is no obligation to file an inheritance tax return (Erbschaftsteuerklärungen) until the German authorities ask for one. However, beneficiaries are generally required to notify officials within 3 months of receiving any inheritance. This is called duty of disclosure. If notice isn’t given, beneficiaries may be subject to penalties for tax fraud.
(Source 08 December 2017)
The inheritance tax return must be filed by the heirs or it can be done by the executor, if one exists.
When a client of a German financial institution dies, the bank or insurance agency informs the tax authorities of any estate assets held by them and provide documents that may impact the taxation of the Estate. Beneficiaries can also provide documentation, like a certificate of inheritance (Erbschein) to the authorities. On the basis of the information received, the German tax authorities determine the inheritance tax due and request the filing of an inheritance tax return (Erbschaftsteuerklärungen). Tax payments can then be sent to the German tax authorities online or through the mail.
(Source 08 December 2017)
If you’re looking to pay online, TransferWise is a good alternative to traditional money transfer services. TransferWise gives you the actual mid-market exchange rate - the same exchange rate you see on Google - saving you from, possible, hidden fees and costly surcharges. Traditional money transfer services often mark up the exchange rate more than you realize. If you have a German bank account, or if you have a friend or family member with one, TransferWise can help you reduce the costs you’re paying from abroad.
Losing a loved one is tough. Don’t make it harder by being trapped by fees and transfer costs from exchanging currency to pay taxes. TransferWise can save your family’s money by giving you the real exchange rate for currency exchanges, often 4-5% lower than typical banks.
If you routinely juggle lives between 2 nations, TransferWise multi-currency borderless accounts could help. TransferWise work with local banking institutions all over the world to allow you to send and manage money in dozens of currencies when you want, including the euro. But, before you make the transfer, make sure to check if the German tax authorities accept third party payments for your inheritance taxes. If not, sending international funds to a trusted friend or family member in Germany can be a good alternative plan, especially if you’re using TransferWise.
When you’re paying taxes abroad or sending money across country lines, the rules can be so much more opaque, and the penalties that much stiffer. TransferWise is a great option to save on fees and hidden costs.
|This publication is provided for general information purposes only and is not intended to cover every aspect of the topics which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content is the publication is accurate, complete or up to date.|