Income tax | Lukinski

Why is inheritance tax also called the “fool’s tax”?

L_kinski — Sat, 06 Sep 2025 16:58:24 +0000

Why do many people call the inheritance tax “fool’s tax”? Because without planning and advice, you often pay five to ten times more than necessary. With a good strategy, you can use exemptions, valuation discounts, exemption rules, and structuring – and reduce the effective tax from potentially 30% to under 5%. Here, I give you a clear overview of how inheritance tax in Germany works, why large inheritances are often taxed less than small ones – and what legal ways exist to drastically reduce the burden.

How does the inheritance tax work in Germany?

The inheritance tax (together with the gift tax) regulates what happens to assets when they are transferred to the state. Three key factors are decisive: tax class (degree of kinship), exemption amount (tax-free base) and Rating (what actually counts as value?). Gifts are included – but many exemption amounts can be renewed every ten years. This is where the largest legal lever lies.

Legal basis: Inheritance Tax Act (ErbStG) + Valuation Act (BewG)
Tax classes I–III depending on the family relationship
Exemption amounts: 500,000 € (spouse), 400,000 € (child), 200,000 € (grandchild), 20,000 € (class III)
Support exemption: up to 256,000 € (spouse), 10,300–52,000 € (children depending on age)
Ten-year rule for gifts – repeatable
Benefits: business assets, family home, rented residential property (10 % discount)
Progressive tax rates: 7 % to 50 %

Tax classes, exemption amounts & tax rates at a glance

The tax class determines the tax exemption AND the tax rate – a double lever. Anyone who inherits as a partner without a marriage certificate falls into class III: 20,000 € tax exemption, after that at least 30 % tax. In the case of an inherited condominium worth 600,000 €, this quickly amounts to around 174,000 € in tax – something a spouse would never have to pay.

Relationship	Class	Tax exemption	Tax rate
Spouse / registered life partner	I	500,000 €	7–30 %
Child, stepchild, grandchild (deceased parents)	I	400,000 €	7–30 %
Grandchild	I	200,000 €	7–30 %
Parents, grandparents (inheritance)	I	100,000 €	7–30 %
Siblings, nieces, nephews, in-laws	II	20,000 €	15–43 %
Partner without marriage certificate, friends, third parties	III	20,000 €	30–50 %

Helpful Links & Sources:

Family Home & Deferrals: Protection for Your Home

The self-occupied family home can remain tax-free when transferred to a spouse unlimited or to children up to 200 m² living area – under certain conditions. Important: The heir must move into the property immediately and occupy it themselves for at least ten years. Renting out, selling, or leaving the property vacant within the period results in retroactive loss of the tax exemption.

Spouse: no size restrictions, 10 years of self-occupation
Child: tax-free up to 200 m², taxable in proportion above that
Deferral possible (§28 InhStG): up to 10 years in case of asset endangerment
Attention: Moving to a nursing home within the period does not automatically lead to loss
Rented residential properties: 10 % valuation discount (§13d InhStG)

§13 InhStG Family Home | §13d InhStG Rented Residential Land

Business assets: Exemption of 85 % or 100 %

When inheriting a business, the standard exemption (85 %) or the option exemption (100 %) applies – if the conditions are met. This is where the “Dumm tax” often becomes a zero tax. However, those who violate the conditions lose the exemption retroactively – with interest.

Standard exemption: 85 % tax-free, 5-year holding period, total wages 400 % over 5 years
Option exemption: 100 % tax-free, 7-year holding period, total wages 700 % over 7 years
Administrative asset ratio: max. 90 % (otherwise no exemption required), with 100 % option max. 20 %
Purchase above 26 million €: Discount for small businesses melts away or need assessment
The wage sum rule only applies to companies with fewer than 5 employees

IHK Munich: Business assets and tax exemptions

Heritage & Estate

Why do you save when you inherit a lot? The mechanics behind it

Large inheritances systematically take advantage of favorable conditions. Wealth is structured in such a way that as much as possible ends up in favored “drawers”: business assets, residential real estate, usufruct concepts, stretched gifts, foundations. This reduces the taxable base – and thus the effective tax rate. Studies and responses from the federal government show: On average, large heirs often pay only low single-digit percentages, while middle-class heirs with unplanned inheritances pay the full tax rate.

Effective tax burden for large heirs: frequently 1.5–5 %
Effective tax burden for middle-class unplanned heirs: 15–30 %
Reason: Exemption + tax-free allowances + valuation discounts + structuring
Gift instead of inheritance: Time + Ten-Year Rhythm
Usufruct: Transfer values, retain usage
Foundation solutions for assets from about 5 million €
Protect assets: Deferral, partial payments, refinancing

Real Estate GmbH: Strategically shift tax burden

For large real estate assets, many families opt for a real estate GmbH. Real estate is transferred into the operating assets – and shares tend to benefit from exemption rules. Important: Pure asset management is often considered “management assets” for tax purposes and is NOT favored. Active management is required (own employees, own work) in order for the GmbH to achieve full exemption.

Shares can be transferred in portions (new exemptions every decade)
Combination with usufruct is possible
Caution: 90% management assets test
Cleanly document the separation between operations and management

Family Foundation: Long-term Tax Optimization

A family foundation pools assets and ensures continuity across generations. The foundation does not “die,” so no classic inheritance tax is due every few decades. Instead, the succession tax every 30 years applies – predictable and calculable. This model is particularly relevant for assets in the high single-digit million range.

No inheritance tax during generational change
Succession tax every 30 years (fictional inheritance to 2 children, class I)
Protection against compulsory share and family disputes
High setup costs and ongoing management
Alternative: Foundation & Co. KG for greater flexibility

Design with time: Utilizing the ten-year rhythm

Who starts early distributes wealth through gifts at ten-year intervals. This way, you can use the tax-free allowances multiple times. Example: Both parents can transfer 400,000 € tax-free to each child every ten years – with two children, that’s 1.6 million € per round. Over 30 years and three gift rounds, 4.8 million € in tax-free transfers can be created.

Both parents give gifts separately – tax-free allowances double
Grandparents to grandchildren: 200,000 € per grandparent per grandchild per decade
Chain gifting: Gift to spouse → the spouse gives on (caution: risk of abuse of structuring, waiting period recommended)
Properly document, gift tax declaration is mandatory

Right of Use & Right of Residence: Give away value, keep control

With a reserved Nießbrauch, for example, you transfer a property but secure yourself rental income or usage rights until your death. The capital value of the Nießbrauch is deducted from the gift value – this often reduces the taxable base by 40–60 %, depending on the age of the transferor.

Usufruct value = annual value × multiplier (BMF table, age/life expectancy dependent)
Example: 60-year-old donor, 24,000 € annual rent → approximately 360,000 € value reduction
Donor remains economically secured
Can be combined with division into shares

Berlin-Will & Community Property Swings: The Classics

With the Berlin Will, spouses appoint each other as sole heirs, children inherit only after both have passed away. Tax-wise, this is often an issue: the children’s tax exemption in the first inheritance case is often unused. Solution: include legacies, division arrangements or a Jastrow clause.
The Marital Property Swing uses the change from community property → separate property → back again: the community property adjustment is tax-free under §5 Inheritance Tax Act – even beyond the 500,000 € exemption. Six-figure amounts can thus be transferred tax-free between spouses.

Berlin Will: check mandatory share penalty clauses
Marital Property Swing: notary required, document carefully
Adult Adoption: can upgrade Class III to Class I (rare, but legal)

Why “Dumb Tax”? Poor planning costs real money

Who doesn’t plan at all gives away tax exemptions, loses exemptions due to missed deadlines or slips into higher tax brackets due to an unfavorable structure. Advice closes gaps: asset status, will, division arrangements, prior and subsequent inheritances, foundations. The difference between “doing nothing” and “smart planning”: often tens of thousands to millions.

Example Calculation: 50 Million € Inheritance – With and Without Planning

Der Spiegel reports: “Wealthy business heirs often pay only 1.5% in taxes”. How is that possible? Here’s the comparison:

Scenario A: Without Planning (50 Million € to a child)

Wealth: 50,000,000 € (mix of real estate, securities, cash)
Child’s tax exemption: – 400,000 €
Taxable acquisition: 49,600,000 €
Tax rate in class I for this volume: 30%
inheritance tax: approx. 14.88 Mio. € (effective ~29.8 %

Share deal in real estate: sell company “instead” of property – save taxes

L_kinski — Sun, 11 Feb 2024 13:01:08 +0000

Share deals – saving taxes, but the right way? In my guide to selling a multi-family home for tax purposes, I have just given a short, simple explanation of the share deal, with an example calculation. Instead of 382,000 euros in taxes, only 1,540 euros! How does that work? Here is an insight into asset deals and share deals. You will quickly recognize the advantage and why professional investors work with holding structures.

Only 1.54% tax on real estate sales

One option for a tax-optimized sale is the share deal. In this case, however, the property must already have been purchased by a company (such as Immobilien GmbH) (not as an individual). A share deal is possible if you have the company in a holding structure. This means you only pay 1.54% tax due to the intercompany privilege (§ 8b KStG).

Asset deal = property is sold
Share deal = company is sold (with real estate ownership)

Here is the construct for a share deal in a holding company:

Now let’s calculate our example again, starting with the direct sale of a property!

Sale of a property as a company 🡆 Asset deal

Let’s calculate the exemplary tax in Berlin for the sale of a property as a company (asset deal).

Purchase 2024 = 2,100,000 euros
Sale in 2028 = 4,100,000 euros
Taxable profit Berlin approx. 19.1 % (trade tax 4.1 %, corporation tax 15 %) = EUR 2,000,000
At 19.1 % = 382,000 euros

Sale of a real estate GmbH as a company 🡆 Share deal

Here is a comparison of the tax burden for the sale of a real estate GmbH as a company in Berlin (share deal):

Purchase 2024 = 2,100,000 euros
Sale in 2028 = 3,100,000 euros
Taxable profit = 1,000,000 euros
For GmbH 1.54 % = 1,540 euros

You can see how huge the difference is.

Bonus! No land transfer tax on purchase

Let’s delve a little deeper into the subject of real estate and tax optimization!

Again, simply put:

Sale of Immobilien GmbH below 89% = no real estate transfer tax

Why is this the case? In Germany, the sale of shares in a GmbH that owns real estate is not normally subject to real estate transfer tax as long as the shares are below a certain percentage(§ 5 GrEStG).

What are the advantages? Real estate as an investment must bring a profit, usually calculated by the rental yield. The land transfer tax increases the purchase price by up to 6.5%, depending on the federal state. For 1 million euros, this is a cost of 65,000 euros. This directly increases the yield by a few percent.

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Real estate beginners

Real estate asset deal: What is it? + tax example

L_kinski — Sun, 11 Feb 2024 13:01:02 +0000

There are 2 types of sales when we are in the professional real estate business – i.e. not the condominium or the dream house. Typically, it is about apartment buildings or apartment buildings (rented apartment buildings). Asset deal means that a property is sold directly and share deal means that a real estate GmbH is sold (with its property/properties) – simply put. Here is a look at the typical asset deal and the taxes on the sale. Here you can find out more about the share and asset deal in comparison.

The typical sale: “asset deal”

The difference: In an asset deal in the real estate context, specific assets such as land and buildings are sold individually, whereas in a share deal the shares in the company that owns the real estate are transferred.

Simply put:

Asset deal = property is sold
Share deal = Immobilien GmbH is sold

A share deal means that the buyer does not acquire the property itself, but the – in this case – Immobilien GmbH. Here is a short infographic. Then back to the direct sale of the apartment building, after which I will explain more about the holding company and taxes on the sale.

Here is a small infographic:

Tax calculation: Example

If you sell within the speculation period, you must – simply put – pay tax on the profits as normal, just like income from work, regardless of whether you are employed or self-employed. As a single person, this would typically mean a top tax rate of 42%.

Asset deal as a private individual

In this example, we are selling an apartment building in Berlin, as a private individual, single person with full tax rate.

Purchase 2024 = 2,100,000 euros
Sale in 2033 = 4,100,000 euros
Taxable profit = 2,000,000 euros
At 42 % (single person) = 840,000 euros

Asset Deal as a company

In this example, we are selling an apartment building in Berlin, as a company, already with significant tax savings.

Purchase 2024 = 2,100,000 euros
Sale in 2033 = 4,100,000 euros
Taxable profit Berlin approx. 19.1 % (trade tax 4.1 %, corporation tax 15 %) = EUR 2,000,000
At 19.1 % = 382,000 euros

Share deal property: tax advantages

Saving taxes, but the right way? In my guide to selling a multi-family home for tax purposes, I have just given a short, simple explanation of the share deal, with an example calculation. Instead of 382,000 euros in taxes, only 1,540 euros! How does that work? Here is an insight into asset deals and share deals. You will quickly recognize the advantage and why professional investors work with holding structures.

Share Deal Real Estate
Asset / share deal difference

Real estate holding: box privilege and only 1.54% tax on sale

L_kinski — Sat, 03 Feb 2024 16:36:46 +0000

Nesting privilege, my new favorite word! Although I’ve known about the holding model for ages, today was the first time I heard the term “Schachtelprivileg”. Simply put: only 1.54% tax on the sale of real estate! If you’re wide-eyed now, check out this short article on real estate holding. Tip! Learn more about legal forms and alternatives in Germany here: Legal forms in Germany.

Box privilege: save taxes when selling real estate

Nesting privilege: a term worth knowing!

Although I have been using the holding model in the real estate industry for years, I only recently came across the term “nesting privilege”. The bottom line? Only 1.54% tax on real estate sales! If you’re wondering, let me introduce you to the world of real estate holding in this short article.

The taxation of a real estate GmbH

A GmbH is subject to corporation tax, the solidarity surcharge and trade tax, which results in an effective tax rate of approximately 30%.

However, if you set up your GmbH in the context of real estate projects, you can benefit from the extended reduction in trade tax.

In this case, you only pay 15.83% tax on rental income and lease fees.

The same low tax rate also applies to the sale of real estate. However, care must be taken here to avoid falling into the category of commercial property trading. You may sell a maximum of three properties within five years, otherwise the tax rate rises to 30%.

The share deal offers an even more tax-efficient option for real estate sales.

Real estate holding company: Reduce the tax burden to 1.54%

By cleverly structuring your GmbH, you can reduce the tax burden on the sale of real estate to just 1.54%. A little more striking:

1.54% Taxes on sale

This concept, known as a share deal, benefits from a holding structure and the nesting privilege. Your business structure consists of two limited liability companies. One of the companies acquires the real estate, while the second limited company acts as the parent holding company. If you now want to sell your property, the holding company transfers the shares in your real estate GmbH to the buyer.

The nesting privilege comes into play here

If a corporation sells shares in another corporation, 95% of the profits remain tax-free.

This means that your effective tax rate on the profit from the sale of the property is only 1.54%.

More about GmbH & asset-managing GmbH

Learn more about the GmbH here

Set up a foundation & save taxes: tax benefits and asset protection

L_kinski — Thu, 24 Aug 2023 14:05:03 +0000

A family foundation is one of the most powerful tools for the long-term security of real estate assets – but also one of the most commonly misunderstood. It combines a corporate tax rate of only 15%, protection from creditors, and intergenerational asset binding. At the same time, you pay inheritance replacement tax every 30 years and must calculate the gift tax at establishment. This guide shows with concrete figures when a family foundation becomes worthwhile, where the tax traps lie, and how it compares to a real estate GmbH.

Family Foundation: When does it really pay off?

The family foundation is not a mass product. Founding and ongoing costs as well as structural complexity only make sense from a critical asset size.

Rule of thumb equity: From about 1 million euros of free assets or from a real estate portfolio with a sustainable cash flow of 60,000–100,000 euros per year.
Setup Costs: 15,000–40,000 € (notary, foundation charter, tax planning) – details under Family Foundation Costs
Ongoing Costs: 5,000–15,000 € per year (accounting, annual report, foundation supervision, board)
Below this threshold: Real Estate GmbH or asset management GmbH are usually more efficient – overview of all Legal Entities in Germany
Time Horizon: A foundation is only worthwhile if it is bound over two generations (50+ years)

Overview: What you will learn in this guide

The central tax effects of a family foundation establishment at a glance.

Tax Topic	Key Message
Corporate tax on rents	Only 15 % instead of up to 45 % income tax in private assets
Trade tax	For purely asset-managing foundations: 0 € (extended reduction possible)
Gift tax upon establishment	Tax class privilege under § 15 para. 2 Inheritance Tax Act – usually class I, exemption up to 400,000 €
Succession tax	Every 30 years, simulated inheritance case with exemption of 800,000 € (doublable)
Sale profits on real estate	Tax-free after 10-year speculation period (§ 23 Income Tax Act analog)
Distributions to beneficiaries	25 % final tax + solidarity surcharge
Asset protection	After 4 years (§ 3 AnfG) or 10 years in case of intent protected from creditors

Tip! Family foundation from A–Z with insider tax tips on Tax Savings One.

Calculation example: Family foundation vs. private assets vs. GmbH

An investor owns an apartment building with the following key figures:

Market value: 2,000,000 €
Annual net cold rent: 90,000 €
Depreciation & advertising costs: 30,000 €
Taxable profit: 60,000 € per year
Personal marginal tax rate of the investor: 42 %

Tax burden per year in comparison

Position	Private Wealth	Asset Management GmbH	Family Foundation
Taxable Profit	60,000 €	60,000 €	60,000 €
Tax Rate	42 % Income Tax + Solidarity Surcharge	15.8 % Corporation Tax + possibly Dividend Tax	15.8 % Corporation Tax
Trade Tax	—	0 € (reduced deduction)	0 €
Tax per year	approx. 26,600 €	approx. 9,450 €	approx. 9,450 €
Net per year	33,400 €	50,550 €	50,550 €
Tax savings vs. Private	—	+17,150 €	+17,150 €

Over 30 years, this results in a liquidity advantage of approximately 515,000 € compared to private wealth. The family foundation, however, deducts the Succession Tax from this amount (see below).

The five central tax advantages of the family foundation

1. Only 15 % Corporation Tax on rental income

Once real estate is held within the foundation, the rental income is no longer subject to income tax (up to 45% + solidarity surcharge + possibly church tax), but to corporate tax of 15% plus solidarity surcharge – effectively 15.825%.

Rental income in the family foundation is taxed at only 15.825% – instead of up to 47.475% in private assets.

2. Exemption from Trade Tax through Extended Deduction

As long as the foundation exclusively manages its own real estate (no trade, no commercial character), the extended trade tax deduction under § 9 No. 1 Sentence 2 of the Trade Tax Act applies. Effect: 0 € trade tax despite the formal commercial nature of the foundation.

Insider Alert: Photovoltaics, holiday rentals with hotel characteristics, or subletting of business equipment can overturn the extended deduction – then suddenly 14–17% trade tax may apply to the entire profit.

3. 10-Year Speculation Period Also in the Foundation

Dispositional gains from real estate are tax-free in the family foundation – unlike in the GmbH – after the ten-year speculation period has expired. The foundation thus combines the advantage of low ongoing taxation (KSt) with the privilege of private assets upon exit. More information can be found in the speculation tax calculator.

4. Low taxation of distributions to beneficiaries

Contributions to the beneficiaries (beneficiaries) are subject to the final tax of 25% plus solidarity surcharge – thus 26.375%. As a result, the total burden (KSt + final tax) is also lower than the top tax rate in private assets, even with full withdrawal.

5. Protection against exit taxation

If the founder plans to move abroad (Switzerland, Dubai, Portugal, etc.), the exit tax under § 6 AStG applies to the private assets or shares in a GmbH – a fictitious disposal with full tax liability on silent reserves. The family foundation, as a legally capable owner, remains in the country and does not trigger this tax. For large assets, this can result in savings potential in the seven-figure range.

Gift tax upon establishment: The tax class privilege

Contrary to common claims, the transfer of assets into a family foundation is not exempt from gift tax. However, the tax class privilege under § 15 Paragraph 2 Sentence 1 of the Inheritance Tax Act applies: The decisive factor is the family relationship to the most distant beneficiary of the foundation.

Tax classes and exemptions

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Furthest Recipient	Tax Class	Exemption	Tax Rate
Spouse	I	500.000 €	7–30 %
Children	I	400.000 €	7–30 %
Grandchildren	I	200.000 €	7–30 %
Siblings, Nieces, Nephews	II	20.000 €	15–43 %
Non-relatives	III	20.000 €	30–50 %

Design Tip: The foundation’s bylaws should consciously limit the beneficiaries to close family members to ensure Tax Class I. Whoever includes “all descendants as well as their spouses” runs the risk of costly errors.

Inheritance Replacement Tax: The Price of Eternity

Since a foundation does not die, the legislature simulates an inheritance case every 30 years – the Inheritance Replacement Tax according to § 1 Abs. 1 No. 4 InhStG.

Calculation and Exemptions

Basis for calculation: Foundation assets minus two tax-free allowances of 400,000 € each (total 800,000 €)
Tax class: Class I (hypothetically: two children as heirs)
Tax rate: 7–30 % depending on the amount of assets
Deferral: With real estate assets, the tax can be spread over up to 30 years (§ 24 Inheritance Tax Act)

Calculation Example Inheritance Replacement Tax

Foundation assets after 30 years: 5,000,000 €

Minus tax-free allowance: 800,000 €
Taxable value: 4,200,000 €
Tax rate Class I: 19 %
Inheritance replacement tax: approx. 798,000 €
With deferral over 30 years: approx. 26,600 € per year

Liquidity trap: Pure real estate foundations without cash reserves get into difficulty every 30 years. Those planning for the long term should build up a liquidity reserve early on or use the deferral option.

Transferring real estate to the foundation: What you need to know

The transfer of existing real estate into a family foundation is legally and taxatively demanding.

Attention: Speculation period when contributing

If a property from private assets is contributed to the foundation before the end of the 10-year period, this can be assessed as a disposal under § 23 EStG – with full speculation tax on the capital gain. A gratuitous transfer can help here, but must be carefully structured.

Land transfer tax upon transfer

The transfer into the foundation generally triggers land transfer tax (3.5–6.5 % depending on the federal state). If the property is gifted to the foundation, the exemption under § 3 No. 2 GrEStG may apply – a prerequisite is a genuine gratuitous transfer.

Asset Protection: When does the protection apply?

4 years after transfer (§ 3 AnfG): Protection against challenge by the foundation’s creditors
10 years in case of intent (§ 3 Para. 1 AnfG): If there was an intent to disadvantage, the period is extended
Voiding of Insolvency (§ 134 InsO): 4 years for unpaid services

Insider: Whoever founds the foundation only when things get tight has no protection. Asset Protection only works “in good times”.

Family Foundation vs. Real Estate GmbH: Which Structure Fits?

Criterion	Family Foundation	Real Estate GmbH
Minimum meaningful assets	from 1