Higher inheritance tax for real estate?

The 2022 Annual Tax Act also contains changes to valuation law that could lead to a higher inheritance tax burden for real estate.

An initially little-noticed change due to the Annual Tax Act 2022 has received a lot of attention in recent weeks. It concerns the adjustment of the regulations for determining the market value to the new Real Estate Valuation Ordinance (ImmoWertV) in the income and asset value method. The increase in the useful life of buildings from 70 to 80 years and the adjustment of the asset value factor as well as the reduction in the property interest rate may result in value increases of 30 % for the tax valuation.

This figure, which has also been widely reported in the media, has startled many property owners and prompted them to want to quickly implement a succession plan at old values before the turn of the year. Although this impulse is understandable, in many cases it is unfounded. In addition, it rarely leads to an ideal structure if you wait so long with succession planning that you are tempted to take hasty action due to planned legislative changes. In addition, it is usually too late for a transfer at old values anyway, because only in exceptional cases will a notary appointment be available before the turn of the year.

However, as a consolation for all taxpayers who have not been able to get a notary appointment or are simply annoyed by the change, there are two rays of hope. Firstly, there is the nature of the change, which will have no impact at all on most properties. In inheritance tax, three different methods are used to determine the tax base:

• Comparative value method: The value of owner-occupied apartments and detached and semi-detached houses is usually determined using the comparative value method, i.e. based on the sales price of comparable properties in the surrounding area. This method does not change anything, and as most privately owned properties fall into this category, their taxable value does not change at the turn of the year - apart from the usual developments in the currently stagnating market prices.

• Asset value method: If there are no comparative values because the building has a unique design or because there are not enough comparative values for a property in the countryside, the asset value method is used. In addition to the extension of the useful life from 70 to 80 years, which affects all properties valued using this method, an increase in the asset value factor is also provided for. However, the higher real value factor is only applied if there is no regional factor, which is normally determined by the local expert committee every two years.

• Income capitalization approach: The income capitalization approach applies to commercial properties and larger apartment buildings. Here too, the longer remaining useful life and the reduction in property interest rates are noticeable. In addition, there is a restriction on the management costs to be applied. As with the asset value method, however, the reduction in the property interest rates is only noticeable if the local expert committee does not provide regional property interest rates.

The vast majority of owner-occupied apartments, detached houses and semi-detached houses are therefore not affected by the changes. In most cases, all other properties are only affected to a limited extent (usually mainly by the longer remaining useful life), because practically all larger cities and many smaller municipalities have a local appraisal committee that issues regional valuation factors, which must then continue to be applied. This means that some rural apartment buildings and mixed-use properties or commercial properties and villas are primarily affected.

However, for corporate assets and larger private assets, which usually include such properties, careful and long-term succession planning leads to the best tax results anyway, because an optimal structure can have a much greater impact on the actual tax burden than a mere change in the value of the property would have at present. Please contact us if succession planning from a tax perspective is an issue for you.

The second ray of hope - and not just for property owners - is that there are increasing signs of a noticeable increase in inheritance tax allowances. The tax-free allowances have remained unchanged since the 2009 inheritance tax reform, while property prices have risen by between % and % in the same period. This aspect in particular has led to the number of inheritance tax assessments increasing by a third and tax revenue more than doubling during this period. In particular, the number of spouses and children subject to inheritance tax, for whom the highest tax-free amounts apply anyway, has increased enormously, by almost %.

Because more and more heirs are falling into debt or having to sell their inheritance in order to pay the inheritance tax due, calls for an increase in the tax-free amounts have become louder in recent years. Bavaria has now made an attempt in the Bundesrat, and the governing coalition has agreed in principle to approve a coordinated initiative from the Bundesrat to increase the tax-free amounts.

Current press reports are talking about an increase of 25 %, but this may well be higher. It is not yet clear how quickly the tax-free amounts will be increased, but it is now very likely that they will be. This means that a transfer of real estate assets may even be more favorable at a later date for the properties affected by the adjustments in valuation law if the increase in the tax-free amount is higher than the increase in value due to the new valuation requirements.