What is relieved and by how much: qualifying assets, standard and optional relief

Jana Albrecht takes over her late father's metalworking business with twenty employees; it is worth 4,000,000 €. After her allowance of 400,000 €, the rate table would produce an inheritance tax of 684,000 €, more than the business earns in several years. In fact she pays 22,000 € or nothing at all. Sections 13a and 13b ErbStG make the difference, and they demand something in return.

Why a business is taxed differently from a securities account

German inheritance and gift tax is measured on the fair market value of what is acquired, the price an unrelated buyer would pay. For a portfolio of securities that is harmless: the heirs sell a part and pay the tax. In a business, however, the value sits in machinery, customer relationships and jobs.

If a successor had to raise the full tax from the business, the only options would often be selling equipment or taking a large loan. The legislator therefore created an exemption for certain business assets. It lives in § 13a ErbStG; § 13b decides which assets can qualify at all.

The exemption comes at a price. Whoever uses it commits to carrying on the business for years, broadly keeping the payroll and not withdrawing capital on a large scale. Those conditions are the subject of the second module. The first one settles what is relieved and by how much.

Tax classes, personal allowances and rates are explained in the course on calculating inheritance tax. Here the order is enough: first the value is determined, then the relief for business assets applies, then the personal allowance, and only the remaining amount is taxed at the applicable rate.

The rules apply equally to inheritances and gifts. Where the following sections speak of the acquirer, the donee is meant as much as the heir. Under § 37(12) ErbStG the current version of §§ 13a to 13c applies to acquisitions where the tax arises after 30 June 2016, so it covers acquisitions in 2026 as well.

Which assets can qualify

§ 13b(1) ErbStG names three groups. Only what falls into one of them can be relieved at all. The Act first speaks of assets capable of relief; whether they end up actually relieved is settled only in a second step, the test for administrative assets.

• agricultural and forestry assets, more precisely the domestic operating part under § 168(1) no. 1 BewG, and equivalent assets of a permanent establishment in the EU or the EEA
• domestic business assets when acquiring a whole commercial business, a separate branch, an interest in a partnership or the share of a general partner of a KGaA, together with equivalent establishments in the EU and EEA
• shares in a corporation with its seat or management in Germany, the EU or the EEA, where the deceased or donor directly held more than 25 percent of the nominal capital

For business assets the unit matters. What qualifies is the acquisition of a whole business, a separate branch or a partnership interest, including a fraction of one. Someone who receives only a single machine or a single plot of land out of a business does not acquire qualifying assets within the meaning of this rule.

For a GmbH or a stock corporation the minimum holding decides. What counts is the stake of the deceased or donor, not the share the acquirer receives. A father holding 40 percent who gives 10 percent to his son transfers qualifying shares, even though the son himself receives only 10 percent.

Anyone below the threshold alone can reach it through a pooling agreement. The shareholders bind themselves to dispose of their shares only uniformly or to transfer them only to other bound shareholders, and to vote uniformly towards the other shareholders. The bound shares are then added together.

Family companies with many small stakes often use this route. Its cost returns in the second module: lifting the restriction or the voting pool within the holding period is a harmful event.

§ 13a(5) draws another line. An heir who must pass the relieved assets to a third party under a legacy or an instruction of the deceased gets neither the relief percentage nor the deduction. The same applies if he hands them to a co-heir when the estate is divided. The relief follows the business to whoever keeps it.

Administrative assets: what is not relieved

Not everything on a balance sheet serves the business. A let apartment block, a securities portfolio or a collection of classic cars creates no jobs, even when held as business assets. The Act calls such items administrative assets. They are not meant to become tax-free merely because they sit inside a business.

• land and buildings made available to third parties, with exceptions such as a split business, a lease to the future heir or housing companies requiring a commercial operation
• shares in corporations with a direct holding of 25 percent or less, except for banks, investment firms and insurers
• art, collections, precious metals, classic cars, yachts and similar items of private life, unless trading in them is the main purpose of the business
• securities and comparable receivables, again except in the financial sector
• financial means, that is cash, balances and receivables after deducting debts, to the extent they exceed 15 percent of the value of the business assets

Financial means deserve a second look because almost every business has some. The Act first offsets balances and receivables against debts. The remaining amount counts as administrative assets only to the extent it exceeds 15 percent of the value of the business assets. An ordinary business account therefore usually stays harmless.

That 15 percent base, however, is available only to businesses mainly engaged in agriculture, trade or a liberal profession. A company that merely manages assets cannot use it. Money that belonged to the business for less than two years when the tax arose always counts in full as young financial means.

The calculation runs in three steps. From the fair value of the administrative assets the proportionate debts are deducted, giving the net value. A base of that net value stays harmless, up to 10 percent of the business value remaining after deducting the net value. Only the excess is removed from the relieved assets.

A two-year rule applies here too. Administrative assets that had belonged to the business for less than two years when the tax arose neither fall into the harmless base nor are offset against debts. Private wealth therefore cannot be moved into the business shortly before death to share in the relief.

§ 13b(2) sentence 2 sets the outer limit. If administrative assets, measured before offsetting debts and without the bases, reach at least 90 percent of the fair value, nothing at all is relieved, not even the operating remainder. An asset holding with a small operating appendage then gets nothing.

On death, § 13b(5) offers a way out. If the heir invests administrative assets within two years in items that directly serve the operating activity, their classification lapses retroactively. It requires an investment plan already made by the deceased. The Act does not provide this clause for gifts.

The relevant totals of administrative assets are determined separately under § 13b(10) by the tax office that values the business. Objections to how a property or a balance was classified belong in that separate notice.

Standard relief: 85 percent stays exempt

Under § 13a(1) ErbStG relieved assets stay 85 percent tax-free; the Act calls this share the relief percentage. It is granted without application and works on the value, not on the tax. Only the remaining 15 percent enters the taxable acquisition, together with the other assets.

The standard relief has a ceiling: the acquisition of relieved assets must not exceed 26 million euros. All acquisitions of relieved assets from the same person within ten years are added, each at its earlier value. Whoever transfers a business in tranches always calculates with the total.

The aggregation works backwards. If only a mother's third gift to her son crosses the limit, the exemption also lapses for the two earlier gifts, with effect for the past. The assessment period for them ends no earlier than four years after the tax office learned of the last acquisition.

What applies above the ceiling, the tapering under § 13c and the needs test under § 28a, is covered in the second module. For the great majority of family businesses the ceiling is far away anyway.

Certain family companies receive an upfront discount before the relief percentage, under § 13a(9). The articles must cap withdrawals at 37.5 percent of the tax profit reduced by income taxes, permit transfers only to co-shareholders, relatives or a family foundation, and provide for a severance payment below fair value.

The upfront discount equals the percentage by which the severance payment falls below fair value, at most 30 percent. The clauses must be in the articles two years before the acquisition, be applied in practice and then remain in force for 20 years. If they lapse earlier, the exemption lapses retroactively.

The deduction for smaller businesses

After the relief percentage, 15 percent of the relieved assets remains. For smaller businesses § 13a(2) adds a second step: this remainder is disregarded to the extent it does not exceed 150,000 €. The Act calls this the deduction amount (Abzugsbetrag).

The deduction tapers. If the remainder exceeds the 150,000 € threshold, the deduction is reduced by half of the excess. At a remainder of 450,000 € it is used up, because half of the excess 300,000 € is exactly 150,000 €.

Working backwards shows whom it is meant for. Under the standard relief a remainder of 450,000 € corresponds to relieved assets of 3,000,000 €; above that the deduction brings nothing. Up to 1,000,000 € of relieved assets, however, it covers the 15 percent remainder in full, and the business assets stay entirely tax-free.

The deduction also has a ten-year memory. For acquisitions from the same person it can be taken into account only once in that period. Anyone transferring a business in several steps should therefore shape the first tranche so that it makes sensible use of the deduction.

The optional full relief: everything exempt, stricter duties

Instead of the standard relief, the acquirer may choose the optional full relief under § 13a(10). The relieved assets then stay 100 percent tax-free. The deduction loses its function in that case, since no remainder is left for it to act on.

In return, every follow-up duty becomes stricter. The payroll period and the holding period extend from five to seven years, and the minimum payroll totals rise markedly. Whoever opts in commits for longer and more firmly to the business and its workforce.

The option also has an entry condition: administrative assets may make up no more than 20 percent of the qualifying assets. The measurement differs from the one for relieved assets, namely the sum of the fair values of the individual administrative items relative to the fair value of the business.

The election is irrevocable. Anyone who opts in and later breaches the seven-year periods cannot switch back to the standard relief with its five years. The choice should therefore be made only once the plans for the next seven years are in place.

In the let-apartment example administrative assets account for 300,000 € out of 2,000,000 €, that is 15 percent. The option would be available and would exempt the 1,870,000 € of relieved assets in full. The 130,000 € not relieved would stay taxable, whichever route is chosen.

Standard or option: working through the decision

Whether the option pays depends on two questions: how much extra tax it saves, and how certain it is that the business will last seven years. The first can be calculated, the second only estimated. Both belong on the table before the election is made.

For Jana Albrecht from the opening, the standard relief leaves a remainder of 600,000 €, and the deduction is used up. After her allowance as a child, 200,000 € remain taxable. Class I applies a rate of 11 percent, because the amount does not exceed the 300,000 € bracket limit: 22,000 €.

With the optional full relief all relieved assets would be exempt, and no tax would arise. The option therefore saves her 22,000 €. In return her periods grow by two years, and the payroll of her business with twenty employees must reach 700 percent over seven years instead of 400 percent over five.

Without any relief she would have been taxed on 3,600,000 €, at 19 percent, because the acquisition falls into the bracket up to 6,000,000 €: 684,000 €. The comparison shows how much hangs on the conditions. A later breach costs not just the difference between the routes, but part of the entire relief.

A stable business with a clear successor points to the option; foreseeable restructuring or downsizing points to the standard relief. The inheritance tax calculator applies the rate table once the relief has been worked out.