Tax class, allowance, and the clock that runs ten years

A father transfers a plot worth 380,000 € to his daughter in 2019 and a further 120,000 € in 2026. He counts on the 400,000 € allowance twice and expects no tax. Because less than ten years separate the two transfers, they are added together — and tax falls on 100,000 €.

One statute for two events

In Germany inheritance and gifts sit in a single statute, and that is not administrative convenience. Both transfer assets without consideration, and the legislator therefore treats them under largely the same rules.

Tax classes, allowances and rates apply alike to both. Where the statute distinguishes, it says so expressly — and those few places are exactly where a gift can achieve something an inheritance no longer can.

The tax falls on the acquirer, not on the estate. Every heir and every donee is looked at separately, with his own class and his own allowance. An estate of one million shared among four children is, for tax, four acquisitions of 250,000 euros.

By the personal relationship of the acquirer to the deceased or donor, three tax classes are distinguished. The first covers the closest circle, the third everyone else, and the second a middle group of relatives.

Class I covers the spouse and the registered partner, children and stepchildren, the descendants of those children and stepchildren, and parents and grandparents — the last of these, however, only on acquisitions upon death.

That closing rider is the most important subtlety of the section. Parents inherit in class I, but they are given gifts in class II. The same people, the same relationship, and a different allowance depending on the occasion.

Class II is listed expressly: parents and grandparents so far as they do not fall in class I, siblings, first-degree descendants of siblings, stepparents and children-in-law.

First-degree descendants of siblings are nieces and nephews. Their children, by contrast, no longer belong and fall into class III — the degree is to be taken literally and cannot be stretched by a generation.

Class III takes in every other acquirer. Distant relatives, friends, unregistered partners: they all sit there, and the gap to class I is the largest this statute knows.

What is not in class I is striking. Siblings do not belong, although succession law counts them as close family — they sit in class II, with an allowance of 20,000 rather than 400,000 euros.

An unmarried partner is left out too, even after decades of shared life. The statute attaches to formal relationships: marriage, registered partnership, descent — not to lived closeness.

That harshness is intended and is not corrected through the classification. Anyone wanting to soften it must either change the form or work over years with the means that the second module and the ten-year rule open up.

When German law applies at all

Before any class or amount comes the question whether the statute applies to the case at all. Section 2 answers it with a connecting factor that reaches further than most expect.

Unlimited liability for the entire accrual of assets arises where the deceased at the time of death, the donor at the time the gift is carried out, OR the acquirer at the time the tax arises is a resident.

The word or carries the whole reach here. It is enough that ONE of the people involved is a resident — and then the entire accrual is caught, including so far as it is situated abroad.

Residents are natural persons who have a domicile or their habitual residence in Germany. Nationality therefore does not matter for this basic case, nor does the length of the stay.

In practice that means a child living in Germany is taxed here even on an inheritance from abroad, from a deceased person who never lived in Germany. Whether a double taxation treaty limits that again is a second question.

The moment that matters is set out in section 9. On acquisitions upon death the tax arises with the death of the deceased; on gifts among the living, at the time the gift is carried out.

Carried out means, for a sum of money, the credit to the account, and for a plot of land normally not the signing of the contract. That moment also settles which law applies, when the ten-year period starts, and when the reporting deadline begins.

Five allowances, graded by closeness

Section 16 grades the personal allowances by the same logic. In cases of unlimited liability, the acquisition of the spouse and the registered partner is exempt up to 500,000 euros.

Children and stepchildren receive 400,000 euros, and each of them separately. The same 400,000 euros apply to the children of deceased children — a grandchild therefore steps into the position of his deceased parent.

Where that parent is still alive, the grandchild stays on 200,000 euros. The other persons of class I, notably great-grandchildren and inheriting parents, receive 100,000 euros.

For classes II and III the statute names the same figure: 20,000 euros. The difference between those two classes therefore lies not in the allowance but solely in the rate, which the second module covers.

These allowances apply per acquirer and per donor. A child has 400,000 euros against the mother and another 400,000 euros against the father — the two allowances stand side by side and do not consume one another.

The allowance is a true allowance, not an exemption limit. Where the acquisition exceeds it, only the excess is taxed. The base is therefore always the acquisition less the allowance.

Under limited liability the allowance is reduced proportionately. The partial amount corresponds to the ratio of the assets not subject to limited liability to the total acquired from the same person within ten years.

The ten-year period therefore appears here too, this time as the yardstick for a ratio. That is no accident: the same period structures the allowance, the aggregation and the reduction, and once understood it is recognisable in three places.

Earlier acquisitions are again to be taken at their earlier value — the same principle that governs the aggregation. On this point the statute is remarkably consistent.

For the great majority of cases, however, limited liability plays no part. It bites only where NEITHER the deceased or donor NOR the acquirer is a resident and only particular German assets are involved.

The family home, and why it breaks the rules

Alongside the personal allowances the statute knows exemptions attached to particular assets, and one of them is exceptional. Section 13 exempts the family home, and does so with no value limit at all — unlike anything else in this course.

The first variant concerns gifts among the living. Where one spouse gives the other ownership or co-ownership of a developed property, so far as a dwelling in it is used for their own residential purposes, that acquisition is exempt.

Treated alike is release from obligations connected with acquiring or building it, and likewise the case where one spouse bears subsequent construction or maintenance costs for a family home. The same applies to registered partners.

This variant knows neither a value limit nor the ten-year period nor a holding period. It is the furthest-reaching exemption in the statute and the reason why transferring the jointly occupied house between spouses is almost without tax consequence.

The second variant concerns acquisition upon death by the surviving spouse or registered partner. It is drawn more narrowly and turns on three conditions, each of which can fail in practice.

The deceased must have used the dwelling for his own residential purposes up to the death, or have been prevented from doing so for compelling reasons. And it must be intended by the acquirer for his own use without delay — moving in years later does not suffice.

The third condition works into the future. The exemption falls away retroactively where the acquirer ceases to use the family home himself for residential purposes within ten years, unless he is prevented from doing so for compelling reasons.

Compelling reasons mean an impossibility, not an inconvenience. A move for career reasons is generally not enough; the case the statute has in mind is, for instance, a need for care that rules out living there.

The ten-year period: the real planning rule

Up to here the allowance could be used any number of times by splitting an estate into many small gifts. Section 14 prevents exactly that, and it does so with a rule that makes all the rest of the statute practical.

Several benefits accruing from the same person within ten years are added together, by attributing the earlier acquisitions to the last one at their earlier value. The allowance is therefore available once every ten years.

Two limits on this rule deserve attention. Only what comes from the SAME person is aggregated, and what counts is the EARLIER value — an increase in the value of the gifted plot in the meantime does not raise the attribution.

From the tax on the total, the tax is deducted that would have been levied on the earlier acquisitions under the personal circumstances and the rules in force at the time of the last acquisition. There is therefore no double taxation.

Where the tax actually paid on the earlier acquisitions is higher, that amount is deducted instead. And a floor protects the revenue: the deduction may not bring the figure below the tax on the last acquisition taken alone.

Acquisitions for which no positive value arose under the tax valuation principles are disregarded. A gift of negative value therefore does not pull the calculation down.

• the period runs from acquisition to acquisition, not in fixed calendar blocks
• it is counted per donor, not per family
• earlier acquisitions count at their value at the time
• after the ten years the allowance is fully available again

The first item on the list is where planning starts. Because the period rolls, a gift made in 2016 drops out on the same day in 2026 — and from that day the full allowance stands ready again.

The second item doubles the result in many families. Where both parents give, a child has twice 400,000 euros every ten years, that is 800,000 — provided each of them actually transfers assets of their own.

The proviso at the end of that sentence is no formality. Where the mother formally transfers assets that economically belong to the father, the substance is a gift from the father — and the second allowance is not available.

The same holds for passing assets through an intermediary. Where assets are merely handed on without the intermediate acquirer being free to dispose of them, the tax authorities attribute them to whoever they economically came from.

For planning the consequence is plain. The ten-year period rewards acting early, but it demands genuine transfers — anyone starting at eighty has the period available, in practice, only once.