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Changes to the German Valuation Act – Hidden inheritance tax rises due to increased property values?

Changes to the Valuation Act (Bewertungsgesetz, BewG) came into force together with the 2022 Annual Tax Act (Jahressteuergesetz 2022, JStG 2022). The new provisions apply to valuation cut-off dates after the 31.12.2022. In the following section, we have analysed whether or not a ‘hidden’ increase in inheritance tax could occur as a result of the uplift in property values.

Changes to the Valuation Act via the Annual Tax Act

While the tax breaks planned as part of the JStG 2022 were already publicised in the media early on, for a long time there was no mention of the changes to the BewG. It was only shortly before the changes came into force that there was any discussion about whether or not the amendments could lead to considerably higher tax payments. The higher property values that are the root cause for this risk can moreover affect all types of real estate. In this respect, the important changes to the BewG that need to be mentioned are the following (and will be applicable for all valuation cut-off dates after the 31.12.2022):

  • The overall service life of residential properties has been raised from 70 years to 80 years. 
  • For the income capitalisation method, approximated operating expenses based on a percentage of the annual rent will no longer be taken into account, instead there will be a differentiated approach to assessing such costs.
  • The property yields (cf. Section 188 BewG), which lower the building value, have been reduced.
  • For the asset value method, regional asset value factors have been introduced and these have to be published by the committees of valuation experts.
  • The valuation method for heritable building rights has been given a new basis and, in future, buildings on third-party land will be treated analogously.

Hidden inheritance tax rises?

The question that arises is whether or not, as a result of the adjusted valuation parameters, there is now effectively the risk of an increase in inheritance tax that is related to the changes in the BewG. The amount of inheritance tax payable largely depends on the value of the estate as well as the personal tax rate. If the real estate forms part of the inherited or gifted assets then its value has to be determined in accordance with the BewG applicable at that time. Thus, any changes to the BewG will have an indirect impact on the amount of inheritance tax to be assessed.

However, for a large number of towns and municipalities primacy is given to the application of property yields and asset value factors that deviate from the regulatory requirements and that the competent committees of valuation experts have been publishing for many years already. The property yields from the committees of valuation experts were normally already significantly below the legally standardised property yields and, thus, value enhancing. Although the latter have now been adjusted downwards, in part, they are still significantly above those property yields published by the committees of valuation experts. 

Asset value factors for single family houses and houses divided into two flats are likewise published by the competent committees of valuation experts on a regular basis. It is still not at all clear when the regional factors will be published for the first time. 

Moreover, it is important to take into account that the application of the value comparison method has to be given priority for single family houses and houses divided into two flats. If there are comparable values or comparable factors then, according to the BewG, the asset value method and thus asset value factors – as well as the amended service life – may not be applied. Comparable values are calculated on the basis of sales of the same type of properties and made available by the committees of valuation experts. 

It will thus only become apparent in the future whether the modified parameters will lead to higher estimates for property values or whether, on account of the primacy given to the application of data made available by the committees of valuation experts, the ‘proxy values’ in the BewG will have any impact at all. 

Conclusion: Many taxpayers certainly take a dim view of these changes because the taxpayers see the risk of not being able to transfer their property tax-free to the next generation. Ultimately, however, greater attention should be paid to the aim of the BewG, namely, to determine the market value (fair value) of a property in order to tax the enrichment of the buyer, which enhances financial standing. In this context, it should also be noted that, with the envisaged modifications, the intention of the German lawmakers was to accommodate the constitutional provisions with respect to a realistic valuation.

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