Is there German Capital Gains Tax when you sell a German Property?

If you buy or inherit German property (whether it is a house, a flat or just a plot of land) and this property is then sold (by you or your heirs) before a period of ten full years has expired, the resulting profit (sale price minus purchase price minus certain related costs like notary fees) is subject to German tax, even if you are not a German tax resident. There are certain exceptions to this rule, e.g. if you have used the German property exclusively as your private residence. If you have inherited the German property, the years during which the legator had already owned the property does count in your favour.

The relevant statute for this capital gains taxation is section 23 German Income Tax Act (Einkommensteuergesetz). The wording of the tax statute is hard to digest even for a German, but in case you wish to try, here you go:

Einkommensteuergesetz (EStG) § 23 Private Veräußerungsgeschäfte

(1) 1Private Veräußerungsgeschäfte (§ 22 Nummer 2) sind: 1. Veräußerungsgeschäfte bei Grundstücken und Rechten, die den Vorschriften des bürgerlichen Rechts über Grundstücke unterliegen (z. B. Erbbaurecht, Mineralgewinnungsrecht), bei denen der Zeitraum zwischen Anschaffung und Veräußerung nicht mehr als zehn Jahre beträgt. 2Gebäude und Außenanlagen sind einzubeziehen, soweit sie innerhalb dieses Zeitraums errichtet, ausgebaut oder erweitert werden; dies gilt entsprechend für Gebäudeteile, die selbständige unbewegliche Wirtschaftsgüter sind, sowie für Eigentumswohnungen und im Teileigentum stehende Räume. 3Ausgenommen sind Wirtschaftsgüter, die im Zeitraum zwischen Anschaffung oder Fertigstellung und Veräußerung ausschließlich zu eigenen Wohnzwecken oder im Jahr der Veräußerung und in den beiden vorangegangenen Jahren zu eigenen Wohnzwecken genutzt wurden; 2. (… not relevant here); 3. (… not relevant here)
(2) Einkünfte aus privaten Veräußerungsgeschäften der in Absatz 1 bezeichneten Art sind den Einkünften aus anderen Einkunftsarten zuzurechnen, soweit sie zu diesen gehören.
(3) 1Gewinn oder Verlust aus Veräußerungsgeschäften nach Absatz 1 ist der Unterschied zwischen Veräußerungspreis einerseits und den Anschaffungs- oder Herstellungskosten und den Werbungskosten andererseits. 2(.. not relevant here) 4Die Anschaffungs- oder Herstellungskosten mindern sich um Absetzungen für Abnutzung, erhöhte Absetzungen und Sonderabschreibungen, soweit sie bei der Ermittlung der Einkünfte im Sinne des § 2 Absatz 1 Satz 1 Nummer 4 bis 7 abgezogen worden sind. 5Gewinne bleiben steuerfrei, wenn der aus den privaten Veräußerungsgeschäften erzielte Gesamtgewinn im Kalenderjahr weniger als 600 Euro betragen hat. 6 (… not relevant here).
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The profit is then considered to be part of your income in the fiscal year in which the German property is sold, more precisely in which the buyer pays the purchase price. As mentioned above, German income tax is levied on this profit even if otherwise you are not a German tax resident. Whether this profit is also considered to be taxable income in your home country (UK self assessment, US income tax or other) and whether there are double taxation treaties in place for such constellations must be assessed in each individual case.
The above does only apply for private property sales (private Veräußerungsgeschäfte). If the buyer is a business or if a private person buys and sells more than three properties in Germany within a period of five years, then the 10 year exemption is not applicable. In these cases any profit is from selling German real estate is always subject to German income or corporate tax.

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

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

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

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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, sell 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.

Workshop “Clients with Foreign Assets” for British Inheritance & Probate Lawyers

Why would an English or Scottish solicitor even give a toss about German or Spanish inheritance tax laws or about French or Italian forced heirship rules? Well, for starters, in order to avoid the client’s survivors yelling at him/her some years later because they ran into probate or/and foreign tax problems abroad.

Or, and this is of course the far better reason, to really impress your client with advice on international aspects of estate planning the client would otherwise never have thought of. Are you a solicitor or accountant who advises British clients with assets abroad or relatives living outside the UK? Then you might want to check whether you were already aware of some of the tripwires described in this post on international estate planning and will preparation.

Estate Planning for International Families requires seeing the big Picture

A solicitor who knows the basic principles of other jurisdiction’s succession rules and inheritance tax concepts is much more valuable to his client because such a solicitor can avoid structuring English Wills which may have counterproductive consequences in other countries.

The standard advice given by many English solicitors is still: “If you own assets abroad make a separate Will in each of those countries”. Well, this is simply not enough because such wills need to be synchronised both from a practical probate perspective and in regards to the overall inheritance tax consequences. Also, sometimes the better choice is to deal with the foreign assets directly in the English will.

Since 2003, the succession and tax lawyers of Graf & Partner specialise in international estate planning and will preparation with a strong focus on British-German, American-German, British-Austrian and American-Austrian inheritance cases and probate applications. German lawyer Bernhard Schmeilzl regularly gives presentations and conducts inhouse seminars for British and American lawyers and accountants who advise clients who possess foreign assets or who have relatives abroad who shall inherit or receive gifts or legacies. More on these seminars here: Advising Clients with Assets Abroad

The goal of our seminars on international inheritance and tax law is not to make the English solicitor a Jack of all trades or to expose the solicitor to liability risks. Instead, the goal is to give the solicitor a basic idea about where the English estate planning approach might cause problems elsewhere and then team up with the respective experts from those countries to find the best overall solution for the client and his family.

To give you an impression of the case studies we discuss in our workshops here are a few slides taken from our 90 page power point presentation: Presentation Wills and Estate Planning for International Clients

For more information on German-British or Austrian-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.

German Tax Clearance Certificate (Inheritance Tax)

What is required to get German assets released to British or US-American executors or beneficiaries?

In order to get German assets released, the executors or beneficiaries must be able to provide the German banks or insurers with a German (or European) Grant of Probate – unless the testator has made the will in notarial form or the testator has granted a transmortal power of attorney. For more on how to access German assets without having to go through probate see this post.

What is often forgotten, however, is that in addition to the German grant of probate (Erbschein), the German banks will also ask to see a tax clearance certificate or “certificate of non objection”, in German called “Unbedenklichkeitsbescheinigung”. Without such German tax clearance letter from the German Finanzamt (tax office), the bank is not allowed to release the assets, especially not for a transfer abroad. More on the legal requirements regarding the release of foreign assets to foreign beneficiaries here.

This is what a typical inheritance tax clearance confirmation letter issued by a German tax office (Finanzamt) looks like. Usually, the German tax authorities send the tax clearance certificate directly to the respective bank to inform them about thefact that the monies may now be released to the executor or the beneficiaries.

The clearance certificate is issued by the local German tax office dealing with the inheritance, usually the city where the testator had his or her last Germany residence. To obtain the clearance certificate, the executor or the beneficiaries must submit the German IHT forms and pay any German inheritance tax due.

For more information on cross border probate matters, international will preparation and German inheritance tax matters see the below posts by the international succession law and tax law experts of German law firm Graf & Partners LLP:

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

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Solicitor_SchmeilzlThe Anglo-German 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 and tax 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.

 

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.

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.

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

Some sample slides are available here:

German Intestacy Rules Overview Chart

German IHT inheritance tax gift tax chart

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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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.

International Probate: Assets in Germany will be found (and taxed) by German Tax Office

Nowhere to hide from the German Finanzamt

If the deceased held funds or owned property in Germany, the German Tax Office (Finanzamt) will find out about it and will – most likely – levy German inheritance tax, even if the deceased was not a German national and even if the deceased was not resident in Germany. We have explained the workings of the German Inheritance and Gift Tax Code (Erbschafts- und Schenkungssteuergesetz) here.

Executors are under the legal obligation to submit an inheritance tax declaration (Erbschaftssteuererklärung). The German IHT forms are available for download here.

But would the German tax office (Finanzamt) ever find out about the assets of the testator if the executor would – let’s say – forget to submit such a German IHT declaration? Yes, the tax authorities definitely will find out about such assets of the deceased. For numerous reasons: Continue reading

Expert Reports on German Law

As a full service German and English law firm, established in 2003, we are often asked to provide English Law Firms with an expert report based on issues of German Law.

Solicitor_SchmeilzlBernhard Schmeilzl, a bilingual Lawyer who qualified in 2001 (admitted to the Munich Bar) and is able to provide expert reports to be used in English litigation and arbitration cases based on various issues of German law, whether it be Civil, Commercial or Criminal law, including procedural aspects . Not only does he have a very good grasp of the English Civil Procedure Rules on expert reports, but he also has a vast experience of working closely with Solicitors and Barristers within England. Bernhard has prepared reports for all types of law firms in England, from Magic Circle firms to regional firms, including the following areas:

  • Corporate and commercial law disputes between British and German businesses;
  • Contentious probate matters around the validity of German wills;
  • Accidents involving British citizens in Germany (personal injury, tort); and
  • Medical malpractice cases involving German GP’s and hospitals

In case you need an expert report from a German Solicitor please do not hesitate to call us on +49 (0) 463 7070. More information on litigation and legal fees in Germany is available in these posts:

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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 business and corporate matters, including the representation of clients in M&A transactions. If you wish us to advise or represent you please call German business and litigation lawyer Bernhard Schmeilzl, LL.M. (Leicester) or Munich based English solicitor Elissa Jelowicki on +49 941 463 7070.

Careful with Deed of Variation if Estate comprises Foreign Assets

Using a Deed of Variation in the UK may cause additional Taxes Abroad

Let’s take an easy example: An English testator owns property or a significant investment in Germany, which already triggers German inheritance tax, even if neither the legator nor the beneficiaries are resident in Germany. He has two children and gives the German house (or flat) to child 1, the German investment to child 2. For whatever reasons, the children prefer a different distribution of these assets and thus agree to use a Deed of Variation. From an English law perspective: no problem. From a German tax law perspective: potential financial mayhem for the English beneficiaries. Why?

The German principle of universal, direct and immediate accession of the estate (Generalsukzession, Vonselbsterwerb) means that the beneficiaries (Erben) automatically acquire the estate (or their share of the estate) literally in the second the legator dies. There is no administration persiod, no personal representative etc. From a German inheritance tax perspective this means that it is clear in the second of death of the legator, what the beneficiary has inherited and what the German IHT debt is. This tax situation cannot be changed later on by a deed of variation. This legal instrument is unknown to German law.

The beneficiaries are, of course, free to agree amongst themselves that they wish to distribute the assets differently. However, this is a separate transaction, a second taxable event under German law.

Looking at the above example this means that the German tax office will first levy tax on the situation as it presentated itself from the black letter wording of the Will, i.e. child 1 needs to pay German inheritance tax on the value of the property, child 2 on the value of the investment. The Deed of Variation now is a second, separate taxable event, which can trigger German gift tax (if the house and the investment have different values) and also German property acquisition tax (Grunderwerbsteuer).

Also, there is a risk that the German tax office will not fully recognise the right to apply for unilateral relief (section 23 ErbStG) anymore, which is normally available in cases where UK IHT has already been paid on assets which are also relevant for German IHT.

The details are horribly complicated. Whether actual taxes become due depends on a number of factors, including domicile and residence of everyone involved, nationality, nature of the investment and the relationship between legator and beneficiary as well as between the beneficiaries, because German inheritance tax law allows for personal allowances. These IHT allowances (Steuerfreibeträge) differ hugely (from EUR 20k to EUR 725k), depending on degree of kinship.

The situation is even more complex, if either the legator or any beneficiary had or has a residence in Germany, even if it is just a holiday flat. Because this qualifies the beneficiary as a “Steuerinländer” (tax resident) which means that German IHT applies to either the entire estate (if the UK legator had a German residence) or to all assets the beneficiary with residence in Germany receives, even if these assets are outside of Germany (for details see the posts on German interitance and gift tax listed below).

In summary: If foreign assets are part of an estate, probate lawyers must be extremely cautious and evaluate the inheritance taxes in all countries concerned, before they recommend a deed of variation to be used. Any property swap and any disproportionate distribution of cash or other assets can trigger unexpected additional taxes in some jurisdictions.

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.

 

The Perils of German Inheritance Tax and Gift Tax

German Inheritance Tax applies when British Legators (and their Lawyers) least expect it

UK and US lawyers are used to an inheritance tax regime where (only) the estate as such is being taxed. In that system, it does not matter too much, who the beneficiary is and where he or she is domiciled.

The German Inheritance Tax concept works entirely differently (basics explained here). Instead, it taxes the individual beneficiary. However, if that beneficiary is domiciled outside Germany, the German IHT code also taxes the estate. In other words, to a British lawyer, German IHT also does apply in surprisingly many circumstances, namely: Continue reading