UK Citizens with Property in Germany: Do I need a separate Will?

The Basics of British-German Inheritance Cases

When a British expat lives in Germany for some time, he or she will most probably have a German bank account and other German assets, maybe even have bought property over here. The majority of these British expats have never thought about the inheritance law implications of such foreign assets. They simply assume that UK law applies. This is, however, not always the case. Especially if German probate law and the German inheritance tax office consider the UK citizen to have been domiciled in Germany, then German law applies to the entire (global!) estate. But even if a UK citizen never sets foot on German soil but only invests here, i.e. buys property or company shares, then he / she may be in for some surprises. Or to be precise: their heirs might be.

Let us try to explain the basics of this rather complicated matter of British-German inheritance law cases, using the example of the hypothetical couple Mr and Mrs Liveabroad:

Dr Liveabroad is an engineer who moved to Germany, together with his wife, in 1985 to work for Siemens. After renting an apartment for a few years the couple bought a house near Frankfurt which they jointly own. Mrs Liveabroad also owns a small house in England which the couple use a few times per year. The couple have an adult daughter who also lives in Germany. Mr and Mrs Liveabroad have each made a separate last will and testament under English law. Therein they each appoint the respective other spouse and a solicitor as executor and trustee. They each give their respective estate to a discretionary trust fund that holds the property for a period of 125 years. Beneficiaries are the respective other spouse and their issue.

What happens if the Liveabroads die in a car accident?

I. Principles of German Law of Succession

German law applies the principle of universal succession (Sec 1922 German Civil Code), i.e. the heir (or the “community of heirs” if more than one) automatically assumes the legal position of the deceased in regards to the entire estate (positive and negative assets). This takes place in the “second of death”. Thus, the estate does not have to be transferred to the heir, rather the heir is automatically owner and possessor of all assets, even the negative assets. This means the heir is also personally liable for all debts of the deceased! To avoid such personal liability the heir must disclaim the inheritance within a period of six weeks (Sec 1944 German Civil Code)

Due to the principle of universal succession there is, in contrast to English law, no need for a personal representative or executor. In Germany, the appointment of a “Testamentsvollstrecker” (similar to an executor) is the rare exception which must be explicitly chosen in the will. The tool of Testamentsvollstreckung is mainly used if the testator expects his heirs to quarrel later, or if the (potential) heir is still under age or mentally disabled. Or if it is a complicated estate (e.g. a business) that requires an expert to sort out or manage.

The practical problem is that many English wills are not quite clear on the issue of who the heirs are from a German perspective. This can lead to delays and disputes as I will explain in detail below.

II. Importance of Domicile

(i)            For national Laws of Succession

Somewhat simplified, the central criterion for the question which country’s law of succession applies is “domicile”. From the perspective of German law (see Article 25 para 2 EGBGB) the situation for a UK national is this:

Domicile in Germany

UK real estate                                    =>       English law

Moveable goods (UK and Germany)  =>       German law

German real estate                            =>       German law

 

Domicile in UK

UK real estate                                    =>       English law

Moveable goods (incl. in Germany)   =>       English law

German real estate                            =>       German law

 

In other words: In terms of actual property (plots of land, houses, apartments) there will always apply the respective national laws of succession. However, in terms of all other assets (bank accounts, company shares, insurances, paintings, valuables etc.) the domicile criterion decides which national inheritance laws shall apply.

Since the Liveabroads will be seen (by German authorities) to have their domicile in Germany this will have severe implications on their English wills. If the UK authorities consider the Liveabroads as domiciled in the UK then it becomes really complicated and potentially expensive (double inheritance taxation).

(ii)           For German Inheritance Tax

The relevant section 2 of the German Inheritance Tax Act (Erbschafts- und Schenkungssteuergesetz) regulates:

§ 2 Persönliche Steuerpflicht

(1) Die Steuerpflicht tritt ein:

1.)   in den Fällen des § 1 Abs. 1 Nr. 1 bis 3, wenn der Erblasser zur Zeit seines Todes, der Schenker zur Zeit der Ausführung der Schenkung oder der Erwerber zur Zeit der Entstehung der Steuer (§ 9) ein Inländer ist, für den gesamten Vermögensanfall (unbeschränkte Steuerpflicht). Als Inländer gelten:

a) natürliche Personen, die im Inland einen Wohnsitz oder ihren gewöhnlichen Aufenthalt haben, …

 

In practice this means that German authorities will – for inheritance tax purposes – consider someone as an “Inländer”, i.e. domiciled in Germany, when that person was living in Germany at the time of his death. Thus, from a German tax perspective, German inheritance tax is due on the entire estate of both Mr and Mrs Liveabroad, i.e. all their respective assets worldwide.

This is, however, not as dangerous as it may seem at first glance. As is explained in detail here, the German inheritance system works very differently from the UK concept. In the UK, the estate as such is taxed and there is one single nil-rate band of currently 325k GBP available, the excess amount being taxed with a rather hefty 40 percent.

Very different in Germany: The German tax authorities do not look at the estate as such but they look at the personal gain of the individual heirs. This individual gain is taxed depending on the degree of blood relationship of the beneficiary to the legato (for details and a table of tax rates and tax exemptions see here).

Because of the high personal tax exemption amounts for spouses and close relatives German inheritance tax only kicks in when the estate value exceeds a million Euros. If a German testator leaves behind a wife and two children he can pass on 1.3 million Euros without any inheritance tax being due. In reality, the tax free amount is actually even higher, because houses or apartments that are used as family residence can be passed on completely inheritance tax free on top of the personal tax exempt amounts. Plus active businesses can be transferred with a tax privilege if the business continues to trade for a certain period without significantly reducing the employee head count.

For the sake of completeness: Inheritance tax paid in the UK (or another country) will under certain circumstances be credited against German inheritance tax dues. However, in regards to UK taxes this does not happen automatically but the heirs must apply for this within a period of five years.

Bottom line: The Liveabroads, or rather their heir(s), need not worry too much about German inheritance tax. While it may be the usual hassle in regards to necessary paperwork (because every beneficiary must submit a personal inheritance tax declaration), the tax exempt amounts should either suffice to be able to avoid German tax completely or the child will only be taxed with 7 or 11 percent for the amount that exceeds the tax exemption.

III. Assessment of an English Will from a German Perspective

Now, will German probate even accept the existing wills made by Mr and Mrs Liveabroad? And if so, what will German probate and German tax office think of the legal construct of the English trust fund?

(i)            Formal Requirements

German law requires wills to either be written and signed by one’s own hand (holographic will, see Sec 2247 German Civil Code) or be declared before a German notary (so called “public will”, see Sec 2232 German Civil Code).

However, as an exception to this rule, German law also accepts wills that are made in other forms when, inter alia, the testator makes a will that complies with of the law of the country of which the testator was a national at the time when he made the testamentary disposition or at the time of his death (see: Sec 26 para 1.1 Introductory Act to the Civil Code).

Thus, the existing wills of the Liveabroads will be accepted as valid wills regarding formal requirements.

(ii)           Substantive Assessment

As explained above, German inheritance law works with the principle of universal succession. The first and most important question any German lawyer, including the judge at German Probate Court (Nachlassgericht), will ask is: Who is the heir (Erbe)? This is because the estate (at least the German property, maybe also foreign moveables) must be attributed to those heirs. German land registry must for example enter into the Grundbuch, who is now the owner of German property.

The Finanzamt (German tax office) will ask the same question because, as described above, the heirs are being taxed personally, not the estate as such.

In other words: Under German succession law everything centers around the heir (or the community of heirs).

In our example case, the existing English wills of the Liveabroads do not really provide a clear answer to this question, because the estate is given to a testamentary discretionary trust to hold this estate for 125 years. Such a “testamentary trust” is, however, not accepted under German law for inheritance law purposes. It is “nicht rechtsfähig”, i.e. not a separate legal entity. Only legal bodies can be heirs under German law, i.e. individuals, companies etc. If a German testator wants to achieve a similar result to a UK style trust this requires the formation of a ”rechtsfähige Stiftung” (German trust foundation), which is rather complicated and expensive. Setting up a UK style trust in an English will does not fulfill the requirements for creating a German Stiftung.

In short: German probate court and German tax authorities need to determine who – from a German perspective – has become heir. If this is not clearly answered in an existing English will, German probate court will have to interpret what the English will would mean under German law. The most probable result would be that German probate court would:

  • either consider the beneficiaries named in the will and living at the time of the case of succession as heirs
  • or reason that the English will does not designate any heir(s) and the court may therefore apply the German intestacy rules; in the example of the Liveabroads this would mean there is a community of heirs (Erbengemeinschaft), consisting of the surviving spouse (entitled to 50% of the estate) and the child.

The appointment of executors and trustees in an English will is, however, not completely without effect in Germany. It will most probably be interpreted by German probate court as a so called “Dauertestamentsvollstreckung” (permanent executorship). However, German law restricts such executorships to a 30 year time limit or to the lifetime of the executor.

IV. What to do when there are German Assets?

An easy way to avoid this ambiguity in regards to how German probate court would interpret an English will could be to complement such will by adding a clause such as:

“For the part of my estate that falls under German law, in particular the real property in …, I hereby appoint as my heirs … and as Testamentsvollstrecker I appoint …”

 

This is, of course only one option and each individual case must be evaluated thoroughly from a UK and a German perspective.

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 enter “probate” or “inheritance” in the search box above.

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.

German Inheritance Tax Rates and Personal Tax Exempt Amounts

What is the German IHT Nil-Rate Band?

German inheritance law, including inheritance tax law, works very differently from the UK system (for German probate see here and here). While in the UK the estate as such is taxed (with one single nil-rate band of currently 325k GBP being available as tax relief) you find a completely different inheritance tax concept in Germany: Continue reading

Executors and Trustees in German Inheritance Law

There exist, as we have explained here, fundamental differences between the inheritance law concepts of the UK and Germany. Since UK probate law requires a personal representative, many testators in the UK appoint an executor in their will. In Germany, however, where a “personal representative” is unknown due to the principle of universal succession, the inheritors come into ownership as well as into possession of the estate automatically and directly. Therefore, appointing an executor (Testamentsvollstrecker) is the exception in Germany, used only in cases where the testator expects the future inheritors to quarrel or where the testators will probably still be under age at the time of inheritance. Furthermore – since the concepts are different – the words “executor” and “Testamentsvollstrecker” are false friends, they have similar but not identical legal powers and obligations.

Now, when a British citizen had all or parts of his estate in Germany at the time of his death, there is the need for a German grant of probate (called “Erbschein”). The probate procedure is explained here and here.

Continue reading

When a deceased UK Citizen owned Assets in Germany

How to get access to an Estate under German Inheritance Law

When a UK citizen dies while having possessions in Germany (bank accounts, deposits, shares, insurance claims or property), one must first determine whether the estate is governed by German hereditary law and thus falls into the competence of German probate courts: Continue reading

Disinherit your no-good children? Not so easy in Germany

According to German inheritance law, close relatives have a right to claim a portion of the estate, even if the testator did not want to leave them anything and has consequently disinherited them. This so called “Pflichtteil” is mostly translated with “statutory share“, “forced share” or “compulsory share“. However, it is difficult to find the correct English word, because this concept does not quite exist in the English or US common law systems. And even to many German heirs this concept comes as a surprise.

Continue reading

Basics of German Inheritance Law (German Probate)

German inheritance law differs very much from UK law and there are many formal requirements which must be followed. A good starting point for basic information about the law of succession in Germany (or any other European country for that matter) is the official EU website “Successions in Europe“. It answers a few basic questions and contains helpful links for more detailed research.

In our CrossChannelLawyers blog we try to dig deeper in regard to many issues of British-German and US-German succession rules, inheritance tax, estate planning and international probate. For starters, let us quickly explain some major differences between UK and German laws of succession.

In Germany, heirs (Erben) are vested with possession, administration and distribution of the estate!

One fundamental difference between UK and German inheritance law, having huge impact on probate procedures, is the German “principle of universal succession“. While in the UK the rule is that a personal representative takes possession of the estate and will eventually distribute the (remaining) property to the beneficiaries the German system is completely different: Here the heir immediately and directly acquires all assets and even all liabilities of the deceased. In other words: all rights and obligations that the deceased person had are automatically transferred onto the heir, the second the devisor dies. Neither a court ruling is necessary, nor a personal representative, executor or trustee. Now, a German heir will in most cases still need a grant of probate (called “Erbschein“) because banks, insurance companies etc will want to see this document for their own protection. If there is more than one heir (for example the surviving spouse and children of the deceased), they form a so called “Erbengemeinschaft”, a “community of heirs”. They own the estate together and have to agree between themselves on how to divide and distribute the assets among them. Which quite often leads to quarrels and legal disputes. So most German inheritance lawyers recommend to draft a will in which the testator (i) either names only one heir and orders this heir to pay out bequests (Vermächtnisse) to the other beneficiaries or (ii) name more than one heirs but include in the will how this shall be distributed among them.

The principle of universal succession also has the effect that the heirs are personally liable for all debts that the deceased had (details here). This can be very dangerous if the heirs are not aware of such debts because there is a six week deadline to reject one’s right as heir. After these six weeks the inheritance is legally being regarded as accepted and the heir must pay all debts of the deceased even if the debts are higher than the assets. Therefore, an heir in Germany should examine all documents and evaluate whether there is a risks ob the estate being insolvent.

A third major difference is inheritance tax: While in the UK there is one nil-rate band for the entire estate and the amount above that is taxed with 40 percent, the German situation is much more complicated. Not the estate as such is being taxed but each individual beneficiary must evaluate for himself whether he has to pay inheritance tax and is personally responsible to contact the tax authorities. Thus, in contrast to the UK, German probate courts will issue the Erbschein without regard to taxation issues. Spouses and close relatives have rather high tax exempt amounts (Steuerfreibeträge), a spouse for example has 500,000 Euros plus (!) the familiy home; each child has 400,000 Euros. Beneficiaries that are not closely related to the deceased, however, have much less tax exempt amounts (usually 20,000 Euros) and must also pay higher tax rates than close family members (details in the table of German IHT rates here). So one cannot generally say whether an heir is better off according to German or UK inheritance tax laws, it all depends on the individual situation.

Then, finally, there is the infamous “Pflichtteil” (“forced share“, “elective share” or “compulsory share“) which the spouse and other close relatives can claim if they are disowned in a will. The details of this legal concept are explained here and here.

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 enter “probate” or “inheritance” in the search box above.

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.