Clarifications on inheritance tax exemptions

The Treasury has commented on two rulings concerning the inheritance tax exemption for a family home and the transfer of the tax benefit in the case of inheritance disputes.

There is an exemption from inheritance tax for residential property used by the family itself. This exemption requires, among other things, that the property is used directly by the heir himself, which repeatedly causes disputes with the tax office. For example, the Federal Fiscal Court ruled that the tax exemption is not applicable if the heir is prevented from using the property himself for professional reasons from the outset. A theoretical intention of self-use is not sufficient.

Although the tax authorities apply this ruling, they expressly clarify that it continues to be harmless for the exemption if the heir's need for care at the time of acquisition no longer allows him or her to run his or her own household, or if a child is legally prevented from running a household independently at the time of acquisition because he or she is a minor. In these cases, there are objectively compelling reasons that prevent the acquirer from using the property for his or her own purposes.

Another ruling by the German Federal Fiscal Court relates to the statutory possibility of transferring the preferential tax treatment to a co-heir in the course of an inheritance settlement. According to the ruling, this transfer of beneficiary status is also possible if the agreement on the division of the estate was not made until approximately 15 months after the inheritance. Due to the requirement of immediate owner-occupancy, the tax authorities here only recognized a transfer and a retroactive effect to the time of the inheritance as being timely if the agreement on the division of the estate takes place within six months of the inheritance.

Following the ruling, the tax authorities have at least partially relented: If the inheritance is not divided until after more than six months, the preferential transfer can be granted in justified exceptional cases (e.g. due to inheritance disputes, preparation of expert opinions, etc.). However, the heir must then explain the reasons that prevented the inheritance from being settled within the six-month period. The softening of the six-month period in justified cases applies analogously to the transfer of preferential treatment in the case of tax exemption for rental apartments, business assets, agricultural and forestry operations and shares in corporations.

In addition, the tax authorities clarify that there is an immediate self-use of the acquirer for own residential purposes and thus the tax exemption for the family home is to be granted if the actual use for own residential purposes starts immediately, but the inheritance settlement takes place only afterwards and after the expiration of the six-month period.