Allowances and inheritance tax: facts and tips
Inheritance tax was introduced in its current form in the German Reich as early as 1906. Since then, some things have changed, but the law is still based on the same premises. The most important of these is that inheritance is regarded as an increase in the assets of the heirs and must therefore be taxed like any other income. Other principles, such as the equality of spouses and registered partners, have changed considerably since 1906.
The allowances of inheritance – what is taxed and what is not?
In order to protect the heirs from a large financial burden, different tax rates and allowances apply depending on the degree of relationship. These allowances include various things that do not have to be taxed, so that the heirs do not have to pay the most as taxes, especially in the case of a large estate. You can now find out what the tax-free amounts are and how high they are for the respective family members.
- Life estate: bequeathing correctly
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Pension allowances – precisely regulated for children and spouses
Pension allowances are payable if the partner or children were dependent on the financial support of the deceased. For spouses, the pension allowance is €256,000 provided that the surviving spouse does not have a widow’s pension or occupational pension for which no inheritance tax is payable. If such a pension exists, the value of the pension is determined on the basis of the expected duration of the benefits and the pension allowance is reduced by this value.
Children are entitled to pension allowances that are graduated according to the age of the child at the time of death. Infants up to the age of 5 are entitled to a pension allowance of 52,000 euros. Starting from this point, the pension allowance decreases by approximately 10,000 euros every five years. Children aged 20 to 27 can therefore claim a pension allowance of 10,300 euros, but these allowances are only relevant if the children do not have their own pension payments, such as an orphan’s pension.
- Pension allowances apply if the partner or children were dependent on the deceased’s financial support
- Spouses and registered partners receive 256,000 euros
- Children receive 52,000 euros, but the amount is reduced under certain conditions
Inheritance tax: clever use of allowances – tips from a specialist lawyer
Further allowances – different according to degree of relationship
The other allowances, in addition to the pension allowances, are regulated according to the degree of relationship and are independent of existing survivors’ pensions or own assets. Accordingly, spouses and registered partners inherit an allowance of 500,000 euros. Children of the deceased or grandchildren of the deceased, if their parents die before the inheritance, can claim an allowance of 400,000 euros. Grandchildren whose parents are still alive can claim an allowance of 200,000 euros. Great-grandchildren or the deceased’s own parents are entitled to an allowance of 100,000 euros. All other heirs can claim tax allowances of 20,000 euros. To ensure that as little tax as possible has to be paid on inheritance, the testator can make important decisions long before death and specify them in the will.
Only what remains of the estate after deducting the allowances is taxable. Each taxable acquisition is rounded down to a full €100. The individual tax rates of inheritance tax depend on the different tax classes of the heirs and are also progressively graduated.
- There are other allowances that apply to both inheritance and gifting
- The free allowances are based on the degree of relationship
Gifts – allowances and gift tax
Inheritance tax and gift tax are closely linked. Almost the same allowances apply as in the case of inheritance, however, the gift allowances may only be left tax-free once in ten years. Testators who wish to reduce the inheritance tax for their heirs must therefore start gifting their assets ten years before their death. In the case of patchwork families, this rule means that it can make sense to adopt the spouse’s children in order to bring the tax-free amounts into line with those of the biological children. The adoption does not affect the succession to the other biological parent.
A gift thus actually allows for savings opportunities in inheritance tax. The testators must be aware of these possibilities and use them in a targeted manner in order to have to hand over less of an estate in taxes. Non-marital partners must note that even long-term civil partnerships only allow the given tax allowances if they are officially recognised, either through marriage or through registration of the partnership.
- The same allowances apply to gift tax as to inheritance tax.
- The two are closely linked and follow the same premises
Tax-exempt goods – works of art, libraries or household effects
In addition to tax-free allowances, there are also goods that are tax-free. For close relatives in tax class I, movable assets such as household effects or similar objects of daily use are tax-exempt if they do not exceed a value of 42,000 euros. For all other heirs, a value of 12,000 euros applies here. If works of art, archives or libraries are part of the estate, they are generally exempt from tax at a rate of 60 percent. If the estate includes a building in which one of the heirs lives, this can also be exempt from tax.
- Some goods are tax free or tax exempt up to a certain amount
- Archives, works of art and libraries are 60 percent tax-exempt
You can also find out more about the topic: Bequeathing correctly during your lifetime!
The most important questions on the subject of tax allowances and inheritance tax
Since the allowances vary depending on the degree of relationship and also depend on the succession, questions often arise on this topic. So that you know which allowance you are entitled to and how much inheritance tax is due, the experts at Lukinski answer all the important questions on the subject of allowances and inheritance tax.
What is the allowance for inheritance tax?
The tax-free amounts vary depending on the degree of relationship. For spouses and civil partners, an amount of 500,000 euros applies, for children and grandchildren, if their parents are already deceased, an amount of 400,000 euros applies. For grandchildren whose parents are still alive, an amount of 200,000 euros applies and for parents and grandparents an amount of 100,000 euros applies.
What is the allowance for inheritance between siblings?
In the case of inheritance among siblings, an allowance of 20,000 euros applies. The heirs are subject to tax class 2.
How can I avoid the inheritance tax?
The inheritance tax can be reduced by the testator already starting to give away his inheritance during his lifetime. Here, some guidelines must be followed so that no gift tax is incurred. If everything is observed, the inheritance tax can be reduced by the gift and, depending on the case, can even be completely omitted.
When do I pay inheritance tax?
Inheritance tax is paid by every heir. However, tax is only levied on the amount that exceeds the exempt amount. The possible tax-free amount varies depending on the degree of relationship.
Is a gift taxable?
Gift tax is very close to inheritance tax. In general, a gift must be taxed in the same way as an inheritance, but the same allowances apply here. Testators can therefore minimise inheritance tax by making a gift during their lifetime.
Until when is an inheritance tax-free?
This depends on the degree of kinship. Close relatives such as spouses and children have a higher allowance than grandchildren, parents or grandparents of the deceased.
How much is the inheritance tax?
The amount of inheritance tax depends on the degree of relationship, the amount of the estate but also on the respective allowances. How high the inheritance tax is in each individual case must be calculated individually.