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Gift tax is a key issue in German tax law and plays a decisive role in the transfer of assets within the family or to third parties. An important aspect of gift tax is the allowances that enable gifts up to a certain amount to be transferred tax-free. But what exactly are the rules here, and how can allowances be used optimally?
The gift tax allowance is the amount that the recipient can receive tax-free within a period of ten years. The amount of the allowance depends on the degree of kinship between the donor and the recipient:
Spouses and registered civil partners: £500,000
Children and stepchildren: €400,000
Grandchildren: €200,000
Parents and grandparents: €100,000
Siblings, nieces, nephews, children-in-law, parents-in-law: €20,000
The gift allowance applies per person and can be claimed again every ten years. It may therefore be advisable to transfer larger assets in several steps in order to make optimum use of the allowance.
Careful planning of gifts is crucial in order to maximise tax advantages. There are cases where it may make sense to make gifts in excess of the allowance, even if gift tax is then payable. This could be the case if:
Tax advantages through lower income tax: It may be advantageous to transfer assets to children whose income is lower, so that they have to pay less tax when they sell them at a later date.
Early asset transfer: Particularly in the case of real estate, it often makes sense to transfer assets to children at an early stage to ensure that any subsequent increases in value are owned by the children and are therefore not subject to inheritance tax.
Strategic planning: Those who transfer assets at an early stage can significantly reduce the inheritance tax burden by making optimal use of the gift tax allowance. The deliberate use of a lower tax rate can help to avoid higher tax rates in the future.
Koblenz Regional Court, ruling of 14 March 2024 (Ref. 3 O 457/23)
Subject: Gift of savings
Summary: In this case, it was ruled that the transfer of savings books alone is not sufficient to effect a valid gift of savings. The court clarified that an assignment of the claim against the bank is necessary in order to effectively transfer the credit balance. This assignment can be made either expressly or implicitly if the testator clearly expresses the intention to transfer the credit balance in full by handing over the savings book. Failure to report the gift to the tax office does not affect the validity of the gift, but merely has tax consequences for the recipient.
2. Oldenburg Higher Regional Court, decision of 14 October 2020 (Ref. 11 UF 100/20)
Topic: Gift from parents-in-law
Summary: The Higher Regional Court of Oldenburg ruled that parents-in-law cannot demand the return of a gifted property if it was used as an investment property and not as a family home. The court clarified that a gift, by its very nature, does not require any consideration and is only recoverable under special circumstances, such as serious misconduct on the part of the recipient. The ‘disappearance of the basis of the transaction’ does not apply here, as the property was not intended for use as a family home.
3. Düsseldorf Finance Court, judgement of 13 July 2016 (Ref. 4 K 488/14 Erb)
Topic: Allowances for gifts from donors living abroad
Summary: The Düsseldorf Fiscal Court ruled that a donor living in the United Kingdom can claim the same allowance as a donor living in Germany when transferring property located in Germany.
The ECJ ruled that the legal unequal treatment of persons with limited and unlimited tax liability was incompatible with the free movement of capital. The tax court therefore upheld the claim that the plaintiff could claim the full allowance, regardless of the option of unlimited tax liability
Gift tax and the associated allowances offer numerous opportunities to transfer assets in a tax-efficient manner. The allowances have not changed in 2021, 2022, 2023 or even 2024. Careful planning is essential in order to make optimum use of the allowances and avoid possible tax disadvantages. Given the complexity of the regulations and the many pitfalls, it is advisable to seek advice from an experienced tax advisor. With professional support, you can maximise the tax advantages and ensure that the transfer of assets is legally compliant. Please feel free to give me a call.