Deed of Variation and International Succession

Using a Deed of Variation to mitigate UK Inheritance Tax can backfire if there are Foreign assets or Beneficiaries outside the UK

If someone dies intestate and leaves both a surviving spouse and a child (or children), then UK inheritance tax is due if the value of the estate exceeds GBP 900,000. In these cases, it is tempting to make use of a Deed of Variation in order to “shift” all or a significant additional portion of the estate to the surviving spouse who is entitled to an unlimited spouse exemption. In purely British inheritance cases this is fine.

However, if the deceased or any of the beneficiaries is domiciled or habitually resident outside the UK, for example in Germany, the foreign inheritance tax rules must be taken into account, because then a Deed of Variation may trigger foreign IHT (in addition to UK IHT).

In Germany, as in most continental European jurisdictions, the instrument of Deed of Variation, is not accepted. In other words: While such a Deed of Variation is recognised in Germany as a binding agreement between the parties, such a Deed of Variation does not retroactively alter the IHT situation, i.e. German IHT is always being based on the actual circumstances which had existed upon the moment of death.

Therefore, if the clients decide to use such a Deed of Variation to mitigate UK IHT by “shifting” the assets to the surviving spouse, this will be considered by the German tax office as constituting a gift from child to parent, because the child effectively gives away a portion of his/her inheritance which – due to the German principle of immediate and automatic accession – he/she had already received.

Unfortunately, for such a gift from a child to a parent (upstream gift), German IHT law only grants a personal allowance of EUR 20,000 (twenty-thousand) and the exceeding amount is taxed at 15% (or 20% depending on the amount). In the opposite direction (parent to child, i.e. downstream), there is a personal allowance of EUR 400,000. Upstream lifetime gifts are obviously not considered as being worthy of significant tax allowances.

Thus, while a Deed of Variation may reduce the UK IHT, it will at the same time trigger German IHT if the amount transferred is in excess of EUR 20,000. Yet, since UK IHT is 40% and German IHT in this case only 15 or 20%, a Deed of Variation may still make economic sense. Even a “small” Deed of Variation granting the surviving spouse a specific legacy / bequest of EUR 20,000 (in addition to the statutory legacy of GBP 250,000) would reduce UK IHT by EUR 8,000.

However, one must also consider that UK IHT paid on UK assets can be deducted from any potential German IHT by way of unilateral relief, rendering the possible benefit of a deed of variation even less important from an overall tax perspective. The actual effect must therefore be calculated from an overall perspective, taking into account all national inheritance taxes.

Finally, it should be noted that a Deed of Variation transferring assets upstream goes against the general objective of transferring wealth onto the next generation (downstream). In case of a significant gift child to parents, these assets now transferred upstream will then later have to be transferred back from parent to child, which depletes the personal allowance available to the child.

Therefore, in international inheritance cases, a Deed of Variation may cause more trouble than positive effect.

For more information on German-British probate matters and international will preparation see the below posts by the international succession law experts of Graf & Partners LLP:

Or simply click on the “German Probate” section in the right column of this blog.

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Solicitor_SchmeilzlThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. We are experts ininternational succession matters, probate and inheritance law. If you wish us to advise or represent you in a German or cross border inheritance case please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

Want to become a German?

How to obtain German Citizenship

The general rule is that, in contrast to US law, German citizenship is not automatically established through birth on German territory (birthright citizenship), but by descent from a German legal mother and/or a German legal father. In addition, there are other options to acquire German citizenship, in particular naturalisation (Einbürgerung). You can find more detailed information on this website of the German Federal Office. Also, you may contact a German Mission or German Embassy near you.

The law firm Graf & Partners LLP will be happy to advise and assist in certain matters. However, please note that we cannot provide free advice but will charge legal fees based on time spent.

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Solicitor_SchmeilzlThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German legal issues. If you wish us to advise or represent you in a German or cross border inheritance case please contact German lawyer Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

Everything about German Inheritance & Gift Tax at one Glance

Many of our blogposts deal with German probate and the tax implications of international inheritance cases (see list below). English solicitors and their clients are often stunned by the fact that German assets which are part of an English estate can trigger significant German inheritance and/or gift tax, in addition to UK IHT.

German IHT inheritance tax gift tax chart

German Inheritance & Gift Tax Chart

This schedule shows at one glance the German IHT tax categories (tax classes), the individual tax rates and the various personal allowances and special tax exemptions available for certain assets. As you can see, the German inheritance tax system is much more complicated compared to British IHT. Depending on who the beneficiary is, the tax actually due can be significantly lower or higher than in the UK.

For more information on German-British probate matters and international will preparation see the below posts by the international succession law experts of Graf & Partners LLP:

Or simply click on the “German Probate” section in the right column of this blog.

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Solicitor_SchmeilzlThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. We are experts ininternational succession matters, probate and inheritance law. If you wish us to advise or represent you in a German or cross border inheritance case please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

German Probate can be slow if the Testator has disinherited close Relatives

Why do some German Grants take 4-8 weeks to be issued, others twice as long?

If a German testator has made a holographic will which disinherits those persons who would have been the heirs under German intestacy rules (more here), then the period the testamentary heirs must be patient is usually at least one or months longer than in other cases. This is due to the fact that German probate procedure rules in section 345 FamFG require the German probate registry to formally notify the persons who would have inherited under intestacy rules and inform the about the application. The reason behind this rule is to give these persons the opportunity to raise objections against the validity of the holographic Will. If they do, the Grant is not issued and it becomes a contentious probate proceeding (streitiges Erbscheinsverfahren). If they do not object or if they simply remain silent, then the court will issue the grant. However, if the person who must be notified lives outside of Germany, it can get difficult, weary and tiresome, especially if that person wants to make the testamentary’s life difficult by sabotaging service of the notification document.

For more information on German-British probate matters and international will preparation see the below posts by the international succession law experts of Graf & Partners LLP:

Or simply click on the “German Probate” section in the right column of this blog.

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Solicitor_SchmeilzlThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. If you wish us to advise or represent you in a German or cross border inheritance case please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

German Wills and Grants of Probate are not on Central Public Record

Unlike in England, where Wills and Grants of Probate or Letters of Administration are available to everyone and are easily accessible online, German Grants of Probate and especially German Wills are being considered a private matter. These documents are not publicly accessible. Thus, in Germany, there is no probate search service. Instead, anyone who wishes to obtain information on a certain German inheritance case from the respective local Probate Court must demonstrate to have a so called “berechtigtes Interesse”, i.e. a legitimate interest to obtain this information. For details see section 13 para. (2) FamFG. In practise, this means that the enquirer or his/her lawyer must explain to the local probate court in writing, what he or she needs that information for. In German language, of course.

Related articles are How to obtain German Documentary Evidence for a Criminal Case in England and Searching for Property Information in the German Land Registry.

For more information on German-British probate matters and international will preparation see the below posts by the international succession laws experts of Graf & Partners LLP

Or simply click on the “German Probate” section in the right column of this blog.

seminar_lyndalesIn case you need specific advice in a concrete case or assistance in German probate procedures, feel free to contact the lawyers of the German firm Graf & Partners which are specialized in British-German succession issues. Attorney Bernhard Schmeilzl has years of experience acting as executor and administrator of estates, both in the UK and in Germany. He is an expert in international succesion law and gives lectures and seminars for UK probate solicitors and UK accountants who advise clients with foreign assets.

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The law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. If you wish us to advise or represent you in a German or cross border inheritance case please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

Received an Inheritance in Germany? Be ready for Taxes, Taxes, Taxes!

Check the German Capital Gains Tax situation before you sell your inherited property! Waiting a few years may avoid significant taxes.

If you have received an inheritance which comprises German assets, in particular German property, this inheritance may or may not trigger inheritance taxes in Germany and / or the UK. We have explained these IHT issues in detail in the following posts:

However, inheritance tax (Erbschaftsteuer) is not the only kind of tax you need to consider when you find yourself the beneficiary of a German estate. In many cases, the beneficiaries wish to sell their inherited German property (or other assets), especially if they do not have any ties to Germany and keeping the foreign property would create administrative hassle and force them to hire a German tax advisor and accountant.

Before putting the German property on the market (more here), the beneficiaries should, however, check how long the deceased had already owned the property. If that period was less than 10 years, the sale of the property may create German Income Tax dues in the form of Capital Gains Tax. The relevant German statute is section 23 Einkommensteuergesetz (Income Tax Act).

Solicitor_SchmeilzlEven if the beneficiary is a resident of and domiciled exclusively in the UK and has never had any dealings with the German tax office, selling an inherited asset triggers such German Capital Gains Tax if the ownership-period was less than 10 years (for immoveables) or less than 1 year (for other assets).

The Double Taxation Convention between Germany and the United Kingdom stipulates in article 13:

Article 13 Capital gains
(1) Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.

The full German-British double taxation agreement (Doppelbesteuerungsabkommen Deutschland und UK), or to be precise, the Convention between the Federal Republic of Germany and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, is available for download here: 2010-11-23-grossbritannien-abkommen-dba-gesetz

How is Capital Gains Tax Assessed?

Section 23 para. (3) EStG defines the “Gewinn” (capital gain) as: Selling price minus purchase price minus attributable costs (e.g. notary fees, estate agent fees, land registry fees, land tax, stamp duty, repair and renovation costs etc). Thus, in many cases the actual capital gain is not as high as it may initially appear to the beneficiary if one only considers the increase in property value itself. Whether and to which extent a British tax resident is entitled to these deductions is regulated in section 50 German Income Tax Act. The details, as the statute shows, are hellishly complicated.

In many cases, the actual amount of Capital Gains Tax due in such cross-border inheritance cases is not so high that it would justify keeping the property just for the reason of avoiding that tax. Yet, in expensive cities like Munich, the increase in property value may be significant and it may be a wise choice for the beneficiries to wait until a full 10 year ownership period is reached. Due to the German principle of universal accession, the ownership period of the deceased is not “lost” but the beneficiaries are entitled to claim this period for themselves. If, for example, the deceased had purchased the property 8 years prior to his death, then the beneficiary will only have to keep the property for another 2 years to avoid section 23 Capital Gains Tax.

And then, of course, there is the matter of German land transfer tax, also called property acquisition tax (Grunderwerbsteuer), which is similar to British stamp duty tax, but the tax rates differ from German state to state (a schedule with the respective property acquisition tax rates throughout Germany is available on the Wikipedia website). Thankfully, this tax only concerns the purchaser. Some more details are explained here.

More information on buying property in Germany, the German Land Registry, the German conveyancing process and the rights and duties of tenants and landlords in Germany is available in these posts:

– Legal guide to buying a house or apartment in Germany

– Template of German Land Sale & Purchase Agreement

– Apartment Prices in Germany: How to get a quick Overview

– Searching for Property Information in the German Land Registry

– Tenants beware of Waiver Clauses in German Property Lease Agreements

 

Or simply click on the sections “Property” or “Conveyancing in Germany” in the right column of this blog.

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gp_anz_mav_very_british_en_KOMPLETTE_LINKLISTEThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters.

We also advise and represent foreign clients who wish to purchase or lease property in Germany. In case you would like to obtain specific advice on a specific case or need assistance in buying, selling or leasing property in Germany, please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

What is a “Vermächtnis” in a German Will? And how to claim it.

In the UK (and many other Common Law Jurisdictions) the property of the deceased passes initially to a personal representative (executor or administrator) who administers the estate by collecting it in, paying creditors and taxes and then passing the balance to the beneficiaries. Under German law, however, there is no such administration of the estate by a personal respresentative. Instead, in Germany (as in France) the heirs inherit their share of the estate of the deceased directly on death and automatically assume responsibility for the debts of the deceased and the tax on inheritance. If they do not wish to be a (co-)heir, they need to actively renounce heirship within certain deadlines. This outcome is the same whether there exists a Will appointing the heirs or whether the heirs are defined by German intestacy rules.

Heirs (Erben), under German law, thus administer the estate directly and distribute the assets amongst themselves. Each heir has the right to contact banks, insurance companies and other debtors. The heirs, however, can only act jointly and they must unanimously agree on what steps to take. Thus, the more co-heirs there are, the higher the risk of them starting to quarrel over something, e.g. whether and for how much a flat or jewellery shall be sold. It is therefore, a German succesion lawyer’s standard advice, to keep the number of heirs as low as possible. This does, however, not mean that a German testator is prevented from distributing his assets to a large number of persons.

If a German testator whishes a certain beneficiary to receice a specific gift without making that beneficiary a co-heir, then the best way to achieve this under German inheritance law is to include in the Will a so called “Vermächtnis” (legacy, bequest). This is defined in sec. 1939 German Civil Code:

 Legacy: The deceased may by will give a material benefit to another person without appointing the other person as heir (legacy).

The beneficiary entitled to such a Vermächtnis is called a Vermächtnisnehmer (legatee). He or she is informed by the German Probate Court about the existence of such a testamentary legacy. Then, the legator can (and should) approach the heir(s) and demand the heir(s) to fulfil the legacy. If the legator waits longer than three years then the claim is statute barred under German law. If the will contains a pecuniary legacy, the monies will simply be paid out to the legatee. If, however, a German property (flat, house, plot of land) is bequeathed, then the transfer requires the heirs and the legatee to sign a formal deed before a German notary, as so called Vermächtniserfüllungsvertrag (Legacy Fulfillment Contract).

There are certain circumstances, where the heir(s) can refuse to fulfil the legacy, for example if fulfilling the legacy claim would result in the heir(s) to be stuck with less than what their forced share (Pflichtteil) under German succession law would be.

For more information on German-British probate matters and international will preparation see the below posts by the international succession law experts of Graf & Partners LLP:

Or simply click on the “German Probate” section in the right column of this blog.

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Solicitor_SchmeilzlThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. If you wish us to advise or represent you in a German or cross border inheritance case please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

German Lawyers do not Renew their Practising Certificates each Year

How to check whether a German Lawyer (or other Professional) is properly licensed and insured

Hiring a foreign lawyer involves a certain amount of trust, especially if this lawyer is supposed to handle the client’s funds abroad. Many potential clients from the UK and the USA therefore ask their potential German attorney-at-law (Rechtsanwalt) to provide a copy of their current practising certificate. This request will, however, baffle a German lawyer (or tax advisor, account or auditor). This is because, in contrast to English solicitors, German professionals do not need to renew their professional licenses every year.  Instead, their lawyer’s license – once issued – is perpetual and is only being revoked if the lawyer is in breach of his / her professional duties. The same is true in regards to German professional indemnity insurance (Berufshaftpflichtversicherung).

munich-bar-lawyers-certificateThis, by the way, is what a German lawyer’s genuine practising certificate (Zulassungsurkunde) does look like, in this case issued by the Munich Bar Association (Rechtsanwaltskammer München) back in 2001. They still look the same. The seal at the top of the certificate will look different, of course, depending on which regional German bar association has issued the certificate.

But how, if the lawyer’s certificate was issued years or even decades ago, can you verify if a German lawyer (Rechtsanwalt) is actually still admitted to the German bar association and is currently properly registered? Very easily: Simply visit the official website of the German Federal Bar Association (which is also available in an English version) and enter this persons name to search the entire database of all German advocates admitted to the bar. That way, you can verify whether this lawyer actually exists and what his / her official law firm office adress and phone number are.

More information on German lawyer’s professional regulations are available here:

If you search for German litigation experts who are fluent in English, visit the website of GP Chambers: www.GermanBarristers.com. GP Chambers, with its international expertise, is well equipped to advise and represent clients from the UK, the USA and other English speaking countries.

More information on civil litigation and evidence rules in German Courts of law and before German arbitration tribunals:

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Solicitor_SchmeilzlThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German business and corporate matters, including the representation of clients in M&A transactions, medical malpractice litigation, contentious probate matters or labour law disputes throughout Germany.

If you wish us to provide advice on German law or represent you in court or arbitration proceedings in Germany, please call German lawyer Bernhard Schmeilzl, LL.M. (Leicester) or Munich based English solicitor Elissa Jelowicki on +49 941 463 7070.

Is “Miteigentum” in a German Property the same as “Tenancy in Common”?

Well, it is quite close, if not identical. The German concept of Miteigentum (co-ownership) is regulated by the German Civil Code in sections 1008 to 1011. Each “Miteigentümer” has a direct, separately transferable interest in the property. However, where property is concerned, the rights of co-owners in Germany are usually individually defined in the notarial deeds and the German Land Registry (Grundbuch). In particular, the co-owners usually agree a right of first refusal (Vorkaufsrecht) or they even bind themselves in a way that no one can sell his/her share without the consent of the other co-owners. Thus, in order to really be certain about the rights and obligations that come with a property share in Germany, one must definitely inspect the Land Registry. The rights and obligations amongst the German Tenants in Common are regulated in section 741 ff German Civil Code, titled “Co-ownership by defined shares” (Gemeinschaft nach Bruchteilen). Very much simplified, the basic rule is: everything must be agreed by unanimous vote (section 744 BGB). This means that if the co-owners cannot agree whether (or to whom) the property shall be let or sold, whether it shall renovated (or by whom), then there is deadlock.

If all attempts to reach an amicable solution with the other co-owners has failed, the only way to break free for a tenant in common who is caught in such a situation, is to apply to the local German court (Amtsgericht) for a so called Teilungsversteigerung procedure (compulsory partition by public auction). This means that the entire property (not just one share) is then auctioned off through the court and the proceeds are divided between the co-owners according to the size of their shares. Each co-owner is allowed to participate in the auction. This Teilungsversteigerung should, of course, only be the means of last resort, because it triggers significant court fees, surveyor costs and stress. However, in practice, this happens fairly often in Germany, especially is the Miteigentümergeeinschaft has come into existence due to an inheritance. More on this Miterbengemeinschaft here.

More information on buying property in Germany, the German Land Registry, the German conveyancing process and the rights and duties of tenants and landlords in Germany is available in these posts:

– Legal guide to buying a house or apartment in Germany

– Template of German Land Sale & Purchase Agreement

– Apartment Prices in Germany: How to get a quick Overview

– Searching for Property Information in the German Land Registry

– Tenants beware of Waiver Clauses in German Property Lease Agreements

 

Or simply click on the sections “Property” or “Conveyancing in Germany” in the right column of this blog.

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Solicitor_SchmeilzlThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters.

We also advise and represent foreign clients who wish to purchase or lease property in Germany. In case you would like to obtain specific advice on a specific case or need assistance in buying, selling or leasing property in Germany, please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.

Efficient Transfer of Foreign Assets

Seminar for British Solicitors and UK Accountants who advise Clients with Assets Abroad. Main focus is on Germany, but speakers will also briefly touch upon Austria and Switzerland.

seminar_lyndalesIf you advise clients who own property or other investments abroad, they are not always aware of the fact that this will trigger foreign inheritance taxes and that the executor(s) or beneficiaries will have to go through local probate procedure, which can takes many months and cost many thousands in legal and court fees. Smart Will preparation and other preparatory measures can mitigate costs and speed up foreign probate tremendously.

English Solicitor Stan Harris, OBE and German lawyer Bernhard Schmeilzl, LLM (Leicester) are experienced experts in international succession law, especially British-German probate matters and cross-border inheritance tax issues. On  Thursday, 3 November 2016, they offer a seminar for British lawyers and accountants who advise clients with German assets, bank accounts, stocks and investments. Real life case studies will illustrate how to tackle efficiently tackle probate matters connected to Germany. The topics include:

  • Understanding German Wills and Intestacy Rules
  • Will Preparation for International Families and Expats
  • Making English Wills work in Germany
  • Access Foreign Assets in Germany: is Probate unavoidable?
  • Speed up Probate Procedure
  • Mitigate Inheritance Tax in both Countries

For more information on German-British probate matters and international will preparation see the below posts by the international succession law experts of Graf & Partners LLP:

Or simply click on the “German Probate” section in the right column of this blog.

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Solicitor_SchmeilzlThe law firm Graf & Partners and its German-English litigation department GP Chambers was established in 2003 and has many years of experience with British-German and US-German probate matters, including the representation of clients in contentious probate matters. If you wish us to advise or represent you in a German or cross border inheritance case please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 463 7070.