Germany's Inheritance Tax Reforms Under Threat

by Ulrika Lomas, Tax-News.com, Brussels

13 October 2008

Government ministers face mounting pressure as the deadline for agreeing radical reforms of the German inheritance tax law looms ever nearer.

Although the key points of the new law have already been established, a few outstanding questions remain. Time is of the essence, as, if a consensus is not achieved and the proposals are not brought before Parliament by the end of this year, the reform will collapse.

Proposed changes to the inheritance tax law, approved by the government-commissioned working group in Berlin, will benefit some, whilst disadvantaging others.

Those benefiting from the reform are close relatives who inherit - spouses, children and grandchildren - as, although the tax rate will remain unchanged, they will be entitled to a higher tax allowance. Those benefiting are outlined as follows:

  • In future, a spouse will be able to inherit a sum of up to EUR500,000 without having to pay any inheritance tax. Up until now this figure had been set at EUR307,000.
  • Under the reform, registered long-term relationships will be granted the same tax allowance as married couples, which marks a significant increase from the existing EUR5,200 allowance.
  • Children who inherit a sum of over EUR400,000 will pay inheritance tax.
  • Grandchildren will pay tax on an inheritance sum in excess of EUR200,000. In addition, just as before, there is a tax allowance of EUR40,000 for household contents and EUR12,000 for objects.

Even taking into account the greater tax allowances, those set to be worse off under the new proposals include those who own several properties or those who own expensive property.

The reform stipulates that houses or flats are to be taxed on their actual value, signalling the end of the special position enjoyed up until now, as inheritance tax is often only due on half of the actual value.

According to Anton Steiner, an expert at the German Forum For Inheritance Law, if, for example, a man bequeaths a property with a value of EUR700,000 to his wife, she will pay EUR28,500 more tax under the new law. On the other hand, a small house owned by grandma will be inherited tax free by relatives.

Distant relatives such as brothers and sisters, nieces and nephews and life-long partners will also be disadvantaged, obliged under the amended law to give a greater part of their inheritance to the treasury. Indeed, if they inherit property, in future they too will be required to pay tax on 100% of the property value.

Regarding the inheritance of a business or company, this will remain tax free provided that jobs are held open for a period of ten years and that the company capital is not withdrawn for 15 years.

Despite five hours of consultation on October 9, the working group failed to come to a final agreement, adjourning the discussions until this week. Major areas still to be clarified and agreed upon are issues concerning inheritance tax on property used solely for private residence and the holding period to be imposed on companies.

The government aims to bring the reform into effect in the first half of next year.

Around EUR4bn is generated by inheritance tax.

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