Inheritance tax + community of heirs: New ruling!

In its current ruling, the Federal Fiscal Court contradicts the tax office

Frankfurt am Main

November 4, 2024

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Inheritance tax relief for inheritance settlement

Inheritance tax relief is available for the transfer of business assets, rented residential property, and owner-occupied family homes. Various conditions must be met for this. In practice, children are often named as joint heirs. For example, if two children are named as heirs, they inherit the entire estate as a community of heirs. However, this is often followed by a division of the estate as part of an inheritance settlement.

This means that the community of heirs agrees on who will assume sole ownership of which assets. In such a situation, the heir who takes over the respective assets as part of the inheritance settlement can claim the corresponding inheritance tax relief – subject to certain rules.

The tax authorities have so far assumed that such transfer of tax benefits to the heirs who ultimately take over the assets in the course of the division of the estate is only possible if the division of the estate takes place within six months of the inheritance.

The Federal Fiscal Court has now rejected this strict time limit in its decision of May 15, 2024 (case number II R 12/21). The law does not contain a time limit for the settlement of the inheritance. In the case at issue, the settlement of the inheritance took place approximately three years after the inheritance.

What is crucial, however, is that the transfer to the individual persons takes place as part of the division of the estate. The situation in which the estate is initially intentionally continued undivided in the form of a community of heirs and later divided among the individual members of the community of heirs is no longer eligible.

TaxPro recommendation:

This highlights the considerable scope for structuring such transactions. In particular, the Federal Fiscal Court now allows those affected to carefully prepare the settlement of the inheritance and take the necessary time. However, such transactions should always be implemented with the assistance of tax advice. The specific requirements for inheritance tax relief must be met in order to benefit from the often very significant material advantages of the tax exemptions.