Note the ten-year period!

Like so many things, inheritance and succession are clearly regulated by law in Germany. Nevertheless, inheritance disputes frequently end up in court. The recent ruling by the Federal Fiscal Court concerns the retroactive taxation of an inherited family home.

A widow in Germany couldn't believe it: In 2013, she inherited the family home, which she still lives in, from her deceased husband. A year and a half later, she gifted it to her daughter, while having an unlimited right of residence registered in the land register for herself, and received a letter from the tax office: Suddenly, inheritance tax was due, payable retroactively.

The mother found this demand difficult to understand, so she sued the tax office before the Münster Tax Court and lost in the first instance. She appealed, but the Federal Fiscal Court upheld the decision (judgment of July 11, 2019, case no. II R 38/16).

The reason lies in the fact that a tax-free inheritance is subject to certain conditions: To prevent potential real estate transactions involving inherited properties tax-free, the legislator has stipulated a ten-year period. Thus, a spouse or registered partner in Germany can inherit up to a tax-free allowance of €500,000 – provided that he or she continues to use the property as their primary residence for at least ten years.

This is regulated in the Inheritance and Gift Tax Act (ErbStG) (§ 13, para. 1, no. 4b): "The tax exemption ceases with retroactive effect if the acquirer no longer uses the family home for residential purposes within ten years of acquisition, unless he is prevented from using it for his own residential purposes for compelling reasons." (Such a "compelling reason" would presumably be his own death.)

If the heir moves out before the end of the ten-year period or relinquishes their property, the tax exemption is retroactively revoked. The plaintiff had not considered this and thus lost her right to exemption from inheritance tax.

Sources: kostenlose-urteile.de, zdf.de, rp-online.de, steuertipps.de