Germany's Coalition Finally Unites On Inheritance Tax Reforms

by Ulrika Lomas, Tax-News.com, Brussels

19 November 2008

Following months of uncertainty and discord, Germany’s Coalition Committee has finally ratified the long-awaited reform of its inheritance tax.

Details of the reform, clarified by the government are as follows:

Inheritance of family businesses:

In order to facilitate the succession of a family concern, inheritance tax will not be levied, provided that the company is maintained for a further ten years and that employment levels are maintained throughout this period.

Inheritance of company assets:

• Businesses continued for ten years will remain exempt from inheritance tax, provided that total wage payments remain constant and reach a cumulative 1,000% of the yearly payroll at the time of transfer.
• For firms maintained for a period of seven years, 85% of the company assets will remain exempt from inheritance tax. However, wages must reach a cumulative 650% of the yearly payroll at the time of transfer, after seven years.

In both cases, if the company is sold or dissolved within the stipulated time-frame, inheritance tax will be applied proportionally.

Inheritance of residential property:

Property bequeathed to a spouse or registered partner will not be subject to inheritance tax, irrespective of the actual worth of the property.

Provided that the living area does not exceed 200 square metres, children inheriting a property will not pay inheritance tax. This proviso also applies to grandchildren whose parents are deceased.

As a prerequisite, the property may not be sold, rented or leased within the first ten years following succession, otherwise the property becomes liable to inheritance tax, less tax allowances.

Tax allowances for private assets:

Regarding money and material assets, spouses will in future receive a tax allowance of EUR500,000 and children, a tax allowance of EUR400,000.

The rates for tax applying to siblings, nieces and nephews and to unrelated individuals, remain unchanged.

Reform of the inheritance tax will be discussed during a second and third reading in parliament until the end of November. On December 12, the second legislative chamber, the Bundesrat, aims to conclude the legislative procedure. Subsequently, the new inheritance tax law will enter into effect from January 1, 2009.

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