Tax Advisor for Inheritance Tax: Allowances, Real Estate and Gifts

Inheriting is emotional, and the tax side gets complicated fast. How much tax you pay depends on just a few levers: your relationship to the deceased, the tax-free allowances, and the type of assets. If you know these levers and plan early, you often save a five- or six-figure amount. If you wait, you pay extra.

This guide walks you through the key rules of Erbschaftsteuer, the German inheritance tax: allowances, tax classes, and real estate. It shows how you can save taxes with a Schenkung, a lifetime gift, and when a specialized tax advisor is really worth it.

Note: this article gives a general overview based on the current legal situation and does not replace individual advice. For your specific case, it pays to have a professional take a look.

When is an inheritance taxed?

The tax applies when you inherit or receive assets as a gift above your personal Freibetrag, the tax-free allowance. Only the part above the allowance is taxed. How much you pay in the end comes down in particular to three things: your tax class, tax exemptions, and the value of what you receive.

By the way: the official German name of the tax is Erbschaftsteuer with a single s. In everyday usage, the spelling Erbschaftssteuer has become common. Both mean the same tax, which is why you will come across both variants.

What do you need to do after an inheritance?

Once an inheritance occurs, most people are initially unsure what to do.

Especially when real estate or business assets are involved, it pays to bring in someone early who knows the process and sets up the valuation properly.

Inheritance tax allowances: who receives how much tax-free

The Freibetrag is your most important lever. It depends on how closely you were related to the deceased:

The decisive point about the inheritance tax allowance: it renews every ten years. That is exactly what makes forward-looking gifting so effective, more on that below. And the same allowance also applies to gifts, not just to inheritances.

Tax classes and tax rates

Alongside the allowance, your tax class determines the rate. There are three:

• Tax class I: spouses, children, grandchildren, parents (in the case of inheritance). Rates from 7 to 30 percent.

• Tax class II: siblings, nieces and nephews, sons- and daughters-in-law. Rates from 15 to 43 percent.

• Tax class III: everyone else, such as friends or distant relatives. Rates from 30 to 50 percent.

The closer the relationship and the smaller the taxable acquisition, the lower the rate. That is why leaving assets to distant persons is almost always more expensive than leaving them to close family.

A worked example: how much tax you actually pay

An example makes it tangible. Suppose your father leaves you, his child, assets worth €600,000:

If you inherited the same amount from an unrelated person (tax class III, an allowance of just €20,000), things would look very different: €580,000 would be taxable, and at a rate of 30 percent that means €174,000 in tax. Same amount, almost eight times the tax, purely because of the family relationship.

Inheritance tax on real estate: why the valuation decides everything

With real estate, things get really interesting, and this is where most people make the biggest mistake in their thinking. The problem is rarely the tax itself, but the question: what is the property actually worth?

Many people start from an estimated market value. For inheritance tax on real estate, however, what counts is not your gut feeling but the valuation under the Bewertungsgesetz, the German Valuation Act. The tax office uses standardized methods for this (the comparative value, income value, or asset value method), and the results often differ significantly from what you would have expected.

This is exactly where experience separates itself from improvisation. An experienced advisor has been through these valuations hundreds of times. They spot where the tax office's figure is too high and know when it pays to commission your own appraisal to prove a lower value. They also help you find the right appraiser who meets the formal criteria. In an anticipated succession, a wrong valuation can otherwise become expensive.

Properties rented out for residential purposes are also generally assessed at only 90 percent of their value (Section 13d of the ErbStG, the German Inheritance and Gift Tax Act). If you inherit or transfer a property, this is the moment when tax advisory pays off fastest.

Gift instead of inheritance: the most powerful tax-saving tool

If you have assets and don't want to pay unnecessary tax, you plan during your lifetime. The magic word is Schenkung, a lifetime gift. Because the allowance renews every ten years, an early gift lets you transfer the same assets tax-free several times over.

An example: parents can give each child €400,000 tax-free every ten years. Over two or three decades, a large fortune can be passed on entirely tax-free this way. For cash and liquid assets in particular, this is often the best approach.

For larger fortunes and real estate, further structuring options come into play:

• Nießbrauch (usufruct): You transfer ownership but keep the income, such as the rental payments. That significantly lowers the taxable value of the gift.

• Mixed gift: Part is given away, part is provided in return for consideration, for example an annuity.

• Family pool / company structures: Shares go to the children while a parent keeps control.

• Business assets: can pass up to 85 percent or even 100 percent tax-free under certain conditions.

Which structure fits depends heavily on your life situation and your goals. For families with larger fortunes, this is the core of our work for private clients and family offices.

Two typical starting points, one common denominator

In practice, clients come to us in one of two situations:

1. The inheritance has already happened. Then there is usually complete uncertainty: what do I need to do now? Which tax returns are due, and in what timeframe? What counts here is that someone knows the process and guides you safely through the deadlines.

2. You want to plan ahead. You have assets and want to avoid the tax. This is the classic gifting and planning case, where the right structure saves you the most.

In both cases, the common denominator is experience. The decisive question for any advisor is: have you handled cases exactly like this many times before?

Tax advisor for inheritance tax: when does advice pay off?

A specialized tax advisor pays off whenever valuation or structuring comes into play, and that is almost always the case once real estate, business assets, or larger sums are involved. Frankly, many advisors don't feel confident about asset valuation themselves. An experienced tax advisor for Erbschaftsteuer, on the other hand, knows exactly where the risks lie and where there is room to maneuver.

What a good advisor actually delivers:

• They know the process after an inheritance and keep every deadline.

• They value your assets realistically under the German Valuation Act and spot where an appraisal lowers the value.

• They structure gifts so that the allowances are used to the fullest.

• They think tax and law together, especially in succession and business assets.

What to look for when choosing an advisor

Not every advisor specializes in inheritance and gifts. These are the questions to ask in the first conversation:

• Experience: How many comparable cases have you handled, and does that match my situation?

• Valuation: How do you approach the valuation of my property or my assets? When do you recommend an appraisal?

• Structuring: Which structures are an option for me, and what do they mean in the long run?

• Collaboration: Do you work with lawyers and notaries on legal questions?

If an advisor answers these questions confidently and with concrete examples, you are in the right place. If they dodge the valuation question, probably not.

Structuring inheritance and gifts wisely

Whether you have already inherited or are planning ahead: when it comes to the tax, experience determines how much you end up paying. At Vantoya, we combine tax and legal advice from a single source, value your assets realistically, and structure transfers so that you and your family keep more in the end.