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Tax-optimised transfer of own home to relatives

In the case of inheritance, while it is possible to transfer an owner-occupied home to the remaining spouse free of inheritance tax, nevertheless, this generally initiates a self-usage period of 10 years. If the children inherit the home then the tax exemption would be limited to a living area of 200 sq. m. In the following section, we have highlighted lifetime structuring approaches for tax optimisation.

General information

For tax purposes, every ten years it is possible to make use of an exempt allowance in the amount of € 500,000 between spouses and € 400,000 for each parent in the case of children. Yet, transferring an estate through lifetime gifting can prevent the creation of a community of heirs – something that frequently entails complications in terms of tax and family politics – and, therefore, disputes over inheritance. Through anticipated inheritance, testators are able to actively decide what they wish to do and realise this in a targeted manner during their lifetimes.

Transfer to a spouse

The example of an owner-occupied home also provides an illustration of this. Upon succeeding into the rights of inheritance, a tax-exempt acquisition of the home by a spouse would be possible, however, this would be subject to a self-usage obligation for the following ten years under reservation of subsequent taxation. A further transfer under reservation of usufruct is thus likewise excluded despite the continued own use. This would not apply only if the acquirer is prevented from self-usage for objectively justified overriding reasons, for example, because nursing care is needed or there is mental illness. In this regard, the Federal Fiscal Court (Bundesfinanzhof, BFH), in its ruling of 1.12.2021 (case reference: II R 1/21, BFH/NV 2022 p. 1120) decided that the application of this provision has to be property-based and not beneficiary-based.

The self-usage obligation can be avoided if, during the lifetime of one of the spouses, the property is already transferred to the spouse who is expected to live longer. Nevertheless, safeguards should be put in place for the event that the spouse who received the gift does actually die earlier as well as for the event that the couple divorces. This can be achieved under civil law, for example, via an agreement on recovery rights with a resolutive condition in the original gift agreement. Gifts of owner-occupied homes between spouses do not initiate any self-usage time periods.

Prior to the gifting, existing loan liabilities should be repaid – at the expense of the other assets – as such loans cannot be taken into account to reduce the tax liability in view of the tax exemption. The tax exemption would thus have a greater effect, the lower the encumbrance on the owner-occupied home. At the same time, fewer other assets would have to be transferred in the subsequent period (e.g. cash assets).

Transfers to children

German lawmakers have not provided for a tax exemption for the gifting of an owner-occupied home by parents to their children for self-usage. Solely upon succeeding into the rights of inheritance would there be a tax exemption limited to a living area of 200 sq. m. However, as part of a gifting process it would be possible to grant the parents the right of usufruct. The younger the parents making the gift, the lower the value of the gift because, statistically, the restriction on the use will then still be in place for some time. Here, too, a safeguard can be added to the notarised agreement for the benefit of the parents in the form of an appropriate civil law agreement. Prior to the gifting, loan liabilities should not normally be repaid because – in the absence of a tax exemption – these would now additionally reduce the tax.

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