… and the big misunderstanding regarding the “choice of inheritance (tax) law”
Drafting a Will is no easy matter. It gets even more complicated if you are a mixed-nationality family, if you have assets in more than one country or if you have more than one residence. This posting explains the basic rules of estate planning for British-German spouses or families.
With international inheritance cases and estate planning one must always strictly distinguish between two matters:
(i) Civil inheritance law, i.e. the questions which national rules of succession apply (“who gets what”, are there forced share family provision rules etc) and how is the estate administered (executor or direct accession by the heirs)?
(ii) Inheritance tax law, i.e. the question which country will levy taxes either on the estate as such (UK) or on the individual beneficiaries (Germany).
Since Germany and the UK apply very different rules in regards to both areas described above, the systems are not compatible and the results hugely differ when you look at the matters from a German or from a UK perspective. The German rules of succession (direct and universal succession) are explained here
Thus, in Germany, there is no need for a personal representative. The German Probate judge only wants to know who the heir is / heirs are in order to issue the Certificate of Inheritance. For details see here.
In regard to which national succession laws shall apply, Germany and the UK use different (conflicting) approaches. For German law, the central question is nationality, whereas from a UK perspective the decisive criterion is domicile.
Please note, that the heirs / beneficiaries will need to obtain grant of probate in both countries, because the respective national institutions (banks, investment companies etc) will demand to see the respective national grants before they release/transfer funds and the respective land registries will also demand to see national grants. So, unless all assets will be moved to one country or transferred to beneficiaries during the testator’s lifetime, the heirs must prepare themselves to go through probate proceedings twice.
From the practical view of the probate lawyer, it is therefore important that the Will is set up in a way that both the German Nachlassrichter (probate judge) as well as the English Probate Commissioner, fully understands the content and finds in the will what the judge needs in order to issue the grant as soon as possible.
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Now onto the topic of inheritance tax (IHT) in both countries, which must be assessed entirely separately from the succession rules and probate proceedings, which were discussed above.
1) Under German inheritance tax law, a German national (unless he/she has left the country for at least 5 years) or anyone who has a place of residence in Germany will be considered to be a “Steuerinländer” pursuant to § 2 para. 1, lit. 1a and lit. 1b Erbschafts- und Schenkungssteuergesetz. Thus, the German tax authorities will base their calculation of German IHT on the entire global estate. Whether and how much tax will actually be due depends on the individual tax exemptions available to the beneficiaries, see § 16 ErbStG.
Any exceeding amounts will be taxed with the individual tax rate of the beneficiary. This is a sliding scale starting at 7% and moving up to 30%, depending on the grade of relations and the size of the amount.
2) IHT in the UK: Which assets will be taxed in the UK depends on domicile. If someone was born in Britain or has lived / worked there at any time during his/her lifetime, HMRC will assess this matter in detail (domicile test). From a practical perspective this means that the executors will have to fill in form IHT 401, which is available for download here.
HMRC will also evaluate whether the “deemed domiciled” period has already expired, see HMRC website.
Even in cases where the matter of domicile appears pretty clear, it cannot hurt to emphasize this with a German style will, because domicile also has an emotional / subjective aspect and if the testator explicitly states “I consider myself to be domiciled in Germany” it helps convince HMRC.
When the deceased is accepted to have been domiciled outside the UK, HMRC will “only” tax the assets located within UK, especially property.
3) Unilateral Relief: The above tax rules of the UK and Germany can lead to the unfortunate result that the same assets will be taxed twice. There is no double taxation treaty between Germany and the UK regarding IHT.
However, tax paid in one country can – under certain circumstances – be set off against the IHT paid in the other country (unilateral relief in UK, Anrechnung von im Ausland gezahlten Steuern in Germany). Details on this from a UK perspective are available here
The relevant German statute is § 21 ErbStG. Please note, you will have to actively apply for such relief, as the tax office does not deduct this automatically.
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To remove a common misunderstanding: The EU Succession Regulations (full text available here), also known as Brussels IV or – in German – EU-Erbrechtsverordnung, which were adopted on 4th July 2012, becoming effective as of 17 August 2015 do NOT allow a testator to choose which national inheritance tax rules shall apply. The Regulations have nothing to do with taxes whatsoever, but are only about the choice of national succession law, i.e. rules of succession, forced share rules (Pflichtteilsrecht) etc.
If you are British or a German domiciled in Britain, your options are even less, because the UK and Ireland (as well as Denmark) have opted out of the Brussels IV. However, residents of these countries can still be affected if they live abroad.
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Finally, some frequently asked Questions:
• How do we mitigate German IHT?
Since German inheritance tax law does not tax the estate as such but each individual beneficiary, the easiest method to reduce or avoid German IHT is to distribute the estate to a larger number of people. Instead of giving everything to the children, the testator can additionally include the grand-children, each of which has a personal nil rate band of 200,000 Euro. Technically, this should be done by way of Vermächtnis (pecuniary legacies). This means the grandchildren are not heirs (i.e. will not appear on the certificate of inheritance) but “only” have a claim against the heirs to be paid these amounts. From the heir’s perspective the legacies reduce the inheritance which is taxed.
Another method to reduce or avoid Germn IHT is to gift parts of the German property during the testator’s lifetime, because the German nil rate band renews every 10 ten years. In other words: From the perspective of the German Inheritance & Gift Act (Erbschafts- und Schenkungssteuergesetz) all transfers made within a period of 10 years are added together, i.e. if a mother makes a gift of 200k EUR to her daughter today and then dies before 10 years have expired, then the 300k EUR are simply added to the amount the daughter inherits later. If, however, the donor lives at least for another 10 years after the gift, then the full tax exemption “refreshes itself”.
• Is it better to have one will covering assets in both countries? Or should she have a will in each country?
This depends on who you ask. UK solicitors usually recommend “one will per country”, because the common law thinking is that the estates in each country are being treated separately. The continental approach is different due to the legal doctrine of “universal and direct succession”. For a continental succession lawyer the focus in on the heirs / inheritors, not so much the separate estates.
My personal view is: Since the probate judges (in UK and Germany) will demand to see all existing wills anyway, it is the better choice to have one single will covering all assets worldwide. However, the will should be written for the eyes of both the German and the UK probate judge, i.e. the German probate judge must find in the will the wording “my heirs are…” and the UK probate judge must find in the will “for the administration of my UK assets I appoint xxx as my executor(s)”.
German style wills are valid in the UK as well, so it does not have to be witnessed. More on this see here.
• Any recommendations for mitigating UK IHT?
• What are the consequences of a Trust from a German perspective?
Unfortunately, testamentary trust, which are very common in the UK, is not recognised by German inheritance law, i.e. the German tax authorities will “ignore” such a trust and consider the value of the assets in such a trust to be “received” by the beneficiaries at the moment of death of the testator. In other words: The beneficiaries will be taxed as if there were no trust. However, a trust might still make sense in regards to UK IHT.
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The law firm Graf & Partners was established in 2003 and has many years of experience with British-German and US-German 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