BFH on exemption of family home from estate tax

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An heir inheriting property from his or her parents has a period of six months in which to personally occupy it for residential purposes in order to avoid it being subject to estate tax. That was the verdict of the Bundesfinanzhof (BFH), Germany’s Federal Fiscal Court.

Spouses and children benefit from relatively high tax allowances when inheriting. If tax allowances are exceeded then estate tax becomes due. This often occurs when property becomes part of the estate. We at the commercial law firm MTR Rechtsanwälte note that estate tax may not apply to a property that was occupied by and inherited from parents if the children occupy it themselves for residential purposes without delay.

In a ruling from May 28, 2019, the Bundesfinanzhof settled what it means to personal occupy the family home without delay (Az.: II R 37/16). Children can inherit the property their parents lived in tax-free if they personally occupy it for residential purposes within a period of six months. The BFH held that if they do not occupy the property until a later date, a justification must be provided in order for an exemption from estate tax to remain a possibility.

In the instant case, the heir had waited too long and therefore had to pay estate tax. He had inherited, among other things, a duplex with a living space of 120 square meters from his father in January 2014. The testator had personally lived in this house until his death. Land registration was effected in September 2015, with renovation work not starting until the middle of 2016. This was deemed to be too long by the tax office, which subsequently issued a notice of assessment for estate tax.

The heir’s legal action against the tax assessment was unsuccessful. It was noted that the plaintiff had still not moved into the house he had inherited even after more than two and a half years had passed. As such, he was deemed not to have occupied it for residential purposes without delay. The BFH ruled that in cases where moving in takes place at a later date, estate tax only ceases to apply in exceptional circumstances. However, the plaintiff was not able to demonstrate that he had not been responsible for the delay. The Court therefore concluded that the acquisition was subject to tax.

In cases involving an inheritance or gifts, it is important to be mindful of both tax allowances as well as deadlines to ensure that arrangements are optimal from a tax perspective. Lawyers experienced in tax law can offer advice.

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