Understanding German Inheritance Tax Allowances
The personal allowance (persoenlicher Freibetrag) is the cornerstone of German inheritance and gift tax law. It determines the amount each beneficiary can receive completely tax-free before any tax is calculated. These allowances have remained unchanged since 2009, despite significant inflation and rising property values in Germany, which means they have effectively decreased in real terms over the past 17 years.
The allowance system is tiered based on the closeness of the family relationship. The closer the relationship to the deceased or donor, the higher the allowance. This reflects the German legal principle that providing for close family members is a fundamental social function that should be taxed lightly or not at all.
Complete Allowance Table by Relationship
Spouses and registered civil partners enjoy the highest allowance at 500,000 EUR. This generous amount recognizes that a surviving spouse typically contributed to building the couple's wealth and needs ongoing financial security. Combined with the maintenance allowance and the family home exemption, many spousal inheritances are entirely tax-free.
Children and stepchildren receive 400,000 EUR each. This allowance applies per parent, meaning a child can receive 400,000 EUR from the mother and 400,000 EUR from the father, for a total tax-free transfer of 800,000 EUR from both parents combined. Adopted children are treated identically to biological children.
Grandchildren receive 200,000 EUR, or 400,000 EUR if their parent (the child of the deceased) has already died. This elevated allowance for grandchildren who have lost their parent ensures they are not disadvantaged compared to direct children.
Great-grandchildren receive 100,000 EUR. Parents and grandparents who inherit (not gifts) also receive 100,000 EUR. All other persons -- including siblings, nephews, nieces, and unrelated persons -- receive only 20,000 EUR.
The Maintenance Allowance: An Extra Benefit for Spouses and Children
On top of the personal allowance, surviving spouses and children of the deceased receive an additional maintenance allowance (Versorgungsfreibetrag). This extra allowance is only available in inheritance cases, not for gifts.
The spousal maintenance allowance is 256,000 EUR. For children, the amount depends on age: up to 52,000 EUR for young children, decreasing in steps to 10,300 EUR for children aged 20 to 27. Children aged 27 and older receive no maintenance allowance. Both allowances are reduced by the capitalized value of any survivor's benefits (such as widows' pensions or orphans' benefits) that the heir receives as a result of the death.
In practice, the spousal maintenance allowance is often significantly reduced by pension benefits. A surviving spouse who receives a substantial widow's pension may see their maintenance allowance reduced to zero. However, for spouses of self-employed individuals or those without significant pension entitlements, the maintenance allowance can provide enormous additional tax relief.
Household Goods and Movable Property Allowances
German inheritance tax law provides separate allowances for household goods and other movable property. For Tax Class I beneficiaries, household goods (furniture, kitchen equipment, linens, etc.) are exempt up to 41,000 EUR, and other movable assets (art, jewelry, collections) up to 12,000 EUR. Tax Class II and III beneficiaries receive a combined allowance of only 12,000 EUR for both categories.
These allowances are frequently overlooked in estate planning but can provide meaningful additional tax relief, particularly for estates that include valuable household furnishings or collections.
How to Maximize Your Allowances
The most effective strategy for maximizing allowances is to use the 10-year gift renewal rule. Since every allowance resets after 10 years, a parent who starts gifting early can transfer multiples of the 400,000 EUR allowance to each child over their lifetime. A couple in their 50s could potentially complete three full gifting cycles before reaching their 80s, transferring 2,400,000 EUR per child completely tax-free.
Another maximization strategy involves using chain gifts through intermediate family members. Instead of a grandparent gifting directly to a grandchild (200,000 EUR allowance), the gift can be routed through the parent (400,000 EUR allowance from grandparent to parent, then 400,000 EUR from parent to child). While each step must be a genuine transfer, this approach can significantly increase the total tax-free amount.
Finally, involving both spouses as donors doubles the available allowances. Each parent has a separate 400,000 EUR allowance toward each child, so combined gifts from both parents can reach 800,000 EUR per child per 10-year cycle. Similarly, assets can be shifted between spouses (500,000 EUR allowance) before being gifted to children, ensuring both parents' allowances are fully utilized.
What Happens When Allowances Are Exceeded
When the value of the inheritance or gift exceeds the applicable allowance, only the excess is taxed. The tax rate depends on both the tax class and the amount of the excess. For example, if a child inherits 500,000 EUR, only 100,000 EUR (500,000 minus the 400,000 EUR allowance) is subject to tax at the Tax Class I rate of 11%, resulting in a tax of 11,000 EUR.
It is important to understand that the tax rates are marginal rates applied to the entire taxable amount, not progressive brackets like income tax. If the taxable amount falls into the 15% bracket, the entire taxable amount is taxed at 15%, not just the portion above the previous bracket. This can create cliff effects where a small increase in the estate value leads to a disproportionate increase in tax. The hardship equalization rule (Haerteausgleich) mitigates the worst of these cliff effects but does not eliminate them entirely.