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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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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. 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.