Gift and Inheritance Tax: Transferring Assets Correctly
Tips and advice for gift taxation in Germany
Gifts are always appreciated - but above a certain size they are associated with financial obligations. Gifts of large amounts or of real estate are taxable in Germany under certain circumstances. Whether tax is levied on a gift and how high it is depends on the family relationship between the donor and the donee and the amount of the gift. Up to a certain amount, gifts of property and real estate are tax-free, but if this is exceeded, a report must be made to the relevant tax office, which will demand a gift tax return.
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Good to know about gift tax
Donations of assets in a certain amount or of real estate are taxed in Germany, provided that they exceed a permitted exemption. Anyone who receives a benefit from others for nothing in return must pay this tax. The notification of such a gift to the tax office must be made within three months, both by the recipient and the giver. If the donation is notarized, this is done by the notary. After the report, you will receive a request from the tax authorities to submit a gift tax return. The period granted for this is at least one month.
Gift tax or inheritance tax?
The principles of gift tax and inheritance tax in Germany have some similarities. First and foremost, the purpose of levying gift tax rates is to prevent people from trying to avoid paying tax before they inherit. However, there are differences. For example, the taxation of gifts is already incurred during the lifetime of the donor. There are also differences with regard to additional allowances. For example, the tax exemption can be used every 10 years for a gift, but only once for an inheritance. There are also no tax allowances for a donation. In addition, owner-occupied residential property is tax-free for life partners and spouses, but not for their descendants. For this purpose, parents, grandparents and great-grandparents are assigned to a less favorable tax class when taxing gifts.
Amount of tax and gift allowance
The amount of taxation on gifts depends on the relationship between the donor and the recipient. There are three tax classes. The first includes spouses or registered partners, biological and adopted children, and stepchildren and grandchildren. Tax class II includes divorced and separated partners, siblings, step-parents, and parents-in-law, children-in-law, grandparents and great-grandparents, nieces and nephews. The third tax class includes distantly related and unrelated persons. Depending on which of these tax classes the person receiving the gift belongs to and the degree of kinship, tax-free allowances are set at different amounts. According to the gift tax table, the tax-free amount is 500,000 euros for spouses and civil partners, and 400,000 euros for children and grandchildren whose parents are deceased, as well as for stepchildren and adopted children. If these amounts are exceeded, the gift tax rate is between 7 and 30 percent. For parents or grandparents (tax class II) as well as unrelated beneficiaries (tax class III), up to 20,000 euros can be given away tax-free. In the second tax bracket, the gift tax rate is 15 to 43 percent, in the third it is 30 to 50 percent.
Legally avoiding gift tax: Here's how
There are several approaches you can take to avoid paying taxes on a gift. For example, no gift tax is levied on owner-occupied property that the recipient has lived in for at least 10 years. If donations are made within 10 years in the amount of the tax exemption, no tax is assessed either. After this time has expired, the full gift allowance is available again in full. Also gifts from several people, so-called chain gifts, up to 400,000 euros are tax-free. No tax is levied on occasional gifts either. There is no uniform regulation as to which type of donation is included. Legally recognized opportunities for such gifts include, for example, weddings, anniversaries, birthdays or high school graduation. However, certain values must be adhered to here that match the lifestyle of the recipient.