Improvements to inheritance and gift tax as of 01.01.2025.

Improvements to inheritance and gift tax as of 01.01.2025.

The Annual Tax Act 2024 has made some significant improvements to the Inheritance Tax Act, which will apply to inheritances and gifts from 1 January 2025.

1. lump-sum inheritance costs

These inheritance costs, which generally have to be proven individually, e.g. for the funeral of the deceased, costs for an appropriate grave memorial, the usual grave care and all costs incurred by the acquirer in direct connection with the acquisition, settlement or distribution of the estate or its settlement, reduce the taxable inherited assets. If you do not wish to collect receipts or if the inheritance costs are low, a lump sum can be deducted.

The lump sum has been increased from € 10,300 to € 15,000.

2. estate liabilities with limited inheritance tax liability

As only domestic assets are subject to inheritance tax in the case of limited tax liability, only the debts and charges economically related to these assets could previously be deducted from the taxable assets. This has now been changed due to divergent ECJ case law.

In future, the deductible portion of the inherited debts will be calculated according to the ratio of the value of the assets subject to taxation under the German Inheritance Tax Act to the total value of the acquired assets, less the debts and charges economically related to the assets.

3. reduced valuation for residential property in third countries

Properties let for residential purposes are only taxed at 90% of their value in the case of inheritance and gifts. However, this has so far only applied if the property is located in Germany, the EU or the EEA. Until now, there was no preferential treatment for residential property in third countries, but this has now been changed.

From 1 January 2025, 10% of residential property located in third countries will also be tax-free, although this will only apply if the exchange of information with this third country is ensured. The Federal Ministry of Finance will shortly publish and regularly update a list of countries that fulfil these requirements.

4. tax deferral for residential property

If rented residential property is inherited, the heir can apply to defer the inheritance tax due on it for up to ten years, provided that he can only pay the tax by selling this property. This also applies if the acquisition includes a detached or semi-detached house or residential property that the heir subsequently uses for their own residential purposes, albeit for a limited period of time for the duration of their own use.

This regulation has now been extended to all property used for residential purposes, which means that properties previously used by the deceased for their own purposes and only rented out by the acquirer are also eligible. The same applies to owner-occupied flats in apartment blocks.

By the way:

From 1 January 2025, the usufruct often used in tax-optimised succession planning in favour of the person transferring the assets must be calculated using the new multipliers published by the Federal Ministry of Finance. Due to slightly lower life expectancies, this results in slightly lower multipliers and therefore slightly lower deduction possibilities than before. You can read about how to use usufruct in a tax-optimised way in an earlier article of mine. We will be happy to advise you on these matters!

The changes to the Inheritance and Gift Tax Act as of 1 January 2025 will bring advantages for taxpayers that will lead to tax savings in inheritance cases, but can also be used for asset transfers during a person’s lifetime. The transfer of residential property with the inclusion of usufruct arrangements should be a particular focus in times of low market values.

Improvements in inheritance and gift tax were made by

  • Increase in the lump sum for inheritance costs to € 15,000
  • Changed deduction of estate liabilities with limited tax liability
  • Extended tax exemption and tax deferral options for residential property