Introduction: Why German Inheritance Tax Matters
Germany levies an inheritance and gift tax (Erbschaft- und Schenkungsteuer) that can significantly reduce what heirs actually receive. Unlike some countries that have abolished inheritance tax altogether, Germany maintains a progressive system where the tax rate depends on both the value of the estate and the relationship between the deceased and the heir. In 2026, the rules under the Erbschaftsteuergesetz (ErbStG) continue to apply largely unchanged, but understanding them thoroughly can mean the difference between a tax bill of zero and one running into six figures.
Whether you are expecting an inheritance, planning your own estate, or considering making gifts during your lifetime, this guide covers everything you need to know. We explain the three tax classes, all personal allowances, the progressive tax rates, special exemptions for real estate and business assets, and the most effective legal strategies for minimizing what goes to the tax office instead of your family.
The Three Tax Classes (Steuerklassen)
German inheritance tax groups beneficiaries into three tax classes based on their relationship to the deceased or donor. The tax class determines both the personal allowance and the applicable tax rates. Getting the wrong classification can be extremely expensive, so understanding where you fall is the essential first step.
Tax Class I: Close Family
Tax Class I includes spouses and registered civil partners, children and stepchildren, grandchildren, and -- in the case of inheritance only -- parents and grandparents. These beneficiaries enjoy the highest personal allowances and the lowest tax rates, ranging from 7% to 30%. The rationale is straightforward: the German legal system recognizes that wealth transfers within the immediate family are a normal part of intergenerational provision.
Tax Class II: Extended Family
Tax Class II covers siblings, nephews and nieces, stepparents, parents-in-law, children-in-law, divorced spouses, and -- importantly -- parents and grandparents when receiving gifts (as opposed to inheritances). The allowances are dramatically lower (only 20,000 EUR) and the tax rates range from 15% to 43%. Many people are shocked to discover that siblings fall into this less favorable class.
Tax Class III: Everyone Else
Tax Class III applies to all unrelated persons, including unmarried partners regardless of how long they have been together. The allowance is just 20,000 EUR and tax rates range from 30% to 50%. This is one of the harshest aspects of German inheritance tax and is frequently a source of surprise for long-term unmarried couples who have not taken steps to plan their estates.
Personal Allowances (Freibetraege) at a Glance
Each beneficiary receives a personal allowance that is deducted from the taxable value of the inheritance or gift before any tax is calculated. These allowances are the single most important factor in determining whether you will owe inheritance tax at all. Here is the complete overview for 2026:
Spouses and registered civil partners receive an allowance of 500,000 EUR. Children and stepchildren receive 400,000 EUR each. Grandchildren receive 200,000 EUR (or 400,000 EUR if their parent, i.e. the child of the deceased, has already passed away). Great-grandchildren and parents or grandparents (in inheritance cases) receive 100,000 EUR. All other persons in Tax Classes II and III, including siblings, nephews, nieces, and unrelated persons, receive only 20,000 EUR.
These amounts apply per beneficiary and per relationship. A married couple with two children can therefore pass on up to 1,800,000 EUR completely tax-free (500,000 EUR to the spouse plus 400,000 EUR from each parent to each child). Through strategic use of the 10-year gift rule, these allowances can be multiplied further.
The Maintenance Allowance (Versorgungsfreibetrag)
In addition to the personal allowance, certain heirs receive a special maintenance allowance (Versorgungsfreibetrag) that further reduces the taxable amount. This is only available for inheritances, not for gifts.
Surviving spouses receive a maintenance allowance of 256,000 EUR. However, this amount is reduced by the capitalized value of any survivor's benefits (Versorgungsbezuege) the spouse receives, such as a widow's or widower's pension. In practice, the maintenance allowance is most valuable when the surviving spouse does not receive significant pension benefits from the deceased.
Children receive a maintenance allowance that depends on their age at the time of inheritance. Children up to age 5 receive 52,000 EUR, those aged 5 to 10 receive 41,000 EUR, ages 10 to 15 receive 30,700 EUR, ages 15 to 20 receive 20,500 EUR, and those aged 20 to 27 receive 10,300 EUR. Children aged 27 and older do not receive a maintenance allowance. Like the spousal allowance, these amounts are reduced by any survivor's benefits the child receives.
Progressive Tax Rates: How Much You Actually Pay
Once the personal allowance (and maintenance allowance, if applicable) has been subtracted, the remaining amount is the taxable acquisition (steuerpflichtiger Erwerb). The tax rate is then determined by both the tax class and the size of the taxable acquisition.
For Tax Class I, rates start at 7% for taxable amounts up to 75,000 EUR and rise through 11% (up to 300,000 EUR), 15% (up to 600,000 EUR), 19% (up to 6,000,000 EUR), 23% (up to 13,000,000 EUR), 27% (up to 26,000,000 EUR), and finally 30% for amounts exceeding 26,000,000 EUR.
For Tax Class II, the rates are considerably steeper: 15% for amounts up to 75,000 EUR, 20% up to 300,000 EUR, 25% up to 600,000 EUR, 30% up to 6,000,000 EUR, 35% up to 13,000,000 EUR, 40% up to 26,000,000 EUR, and 43% for amounts above 26,000,000 EUR.
Tax Class III starts at 30% for all amounts up to 6,000,000 EUR and rises to 50% for amounts above 6,000,000 EUR. There is effectively a flat rate structure with only one step.
An important special feature is the hardship equalization rule (Haerteausgleich). If the taxable amount only slightly exceeds a bracket boundary, the resulting tax can sometimes be higher than the excess itself. In such cases, the tax is capped so that the heir retains at least 50% of the amount exceeding the bracket threshold.
Real Estate: Valuation and Special Exemptions
Real estate is often the largest component of an estate in Germany, and the tax law provides several special rules that can significantly reduce or even eliminate the tax burden on inherited property.
First, self-used residential property in Tax Class I receives a 10% valuation discount. This means that if a house is valued at 500,000 EUR for inheritance tax purposes, only 450,000 EUR is counted toward the taxable estate. This discount applies automatically for spouses, children, and other Tax Class I beneficiaries.
Second, the family home exemption (Familienheimbefreiung) can make the inherited family home completely tax-free, regardless of its value. This exemption is available to surviving spouses without any size limitation, and to children if the property does not exceed 200 square meters of living space. The critical condition is that the heir must continue to live in the property as their primary residence for at least 10 years after inheriting it. If the heir moves out before the 10-year period expires, the full tax becomes due retroactively -- with the exception of compelling reasons such as the need for care in a nursing home.
Third, the valuation method itself matters enormously. The tax office (Finanzamt) values real estate according to standardized procedures set out in the Bewertungsgesetz (BewG), using either a comparative value method (Vergleichswertverfahren), an income capitalization method (Ertragswertverfahren), or a replacement cost method (Sachwertverfahren), depending on the property type. These valuations can sometimes exceed or fall below actual market value. If the tax office valuation seems too high, you have the right to commission an independent appraisal (Verkehrswertgutachten) to prove a lower market value.
Business Assets: Exemptions That Can Reach 100%
Germany provides generous exemptions for inherited business assets to ensure that the transfer of family businesses from one generation to the next is not jeopardized by the tax burden. Two exemption levels are available.
The standard exemption (Regelverschonung) exempts 85% of qualifying business assets from inheritance tax. The remaining 15% is taxed at the applicable rate, but a separate allowance of 150,000 EUR is available for this taxed portion. To qualify, the business must maintain at least 400% of its initial payroll sum over the five years following the transfer. Additionally, the ratio of administrative assets (Verwaltungsvermoegen) -- essentially non-operating assets like securities, rental property not part of the core business, or cash beyond operating needs -- must not exceed 90%.
The optional full exemption (Optionsverschonung) provides a 100% exemption from inheritance tax. The requirements are stricter: the payroll sum must be maintained at 700% over seven years, and the administrative assets must not exceed 20% of the total business value. If these conditions are met, the entire business passes tax-free.
For smaller businesses with 20 employees or fewer, the payroll sum requirement does not apply, making the exemptions significantly easier to achieve.
Household Goods and Other Special Allowances
Beyond the personal allowance and maintenance allowance, German inheritance tax law provides additional exemptions for specific types of assets.
Tax Class I beneficiaries receive an additional allowance of 41,000 EUR for household goods (Hausrat) such as furniture, linens, and kitchen equipment, plus 12,000 EUR for other movable assets such as art, jewelry, books, or musical instruments. For Tax Class II and III beneficiaries, both categories are combined into a single allowance of 12,000 EUR.
The funeral cost flat-rate allowance (Bestattungskostenpauschale) of 10,300 EUR is automatically deducted from the estate value for all heirs, covering costs of burial, tombstone, and estate settlement. If actual costs exceed this amount, the higher amount can be claimed with documentation.
The 10-Year Rule: How Gifts Multiply Your Allowances
One of the most powerful tools for inheritance tax planning is the fact that gift tax allowances renew every 10 years. This means that a parent can gift their child 400,000 EUR, wait 10 years, and gift another 400,000 EUR -- both transfers completely tax-free. Over a 30-year planning horizon, a single parent could transfer 1,200,000 EUR to a single child without any tax, and a couple could transfer 2,400,000 EUR.
The 10-year rule applies to all gift tax allowances, not just those for children. Spouses can gift each other 500,000 EUR every 10 years, grandparents can gift grandchildren 200,000 EUR per decade, and even unrelated persons can make use of their 20,000 EUR allowance repeatedly.
Critically, if the donor dies within 10 years of making a gift, the gift is added back to the estate for inheritance tax purposes (though any gift tax already paid is credited). This means that gifts should be made as early as possible to maximize the likelihood that the 10-year window will have elapsed before the donor's death.
Common Tax-Saving Strategies
Strategy 1: Staggered Lifetime Gifts
As discussed above, making regular gifts within the allowance limits every 10 years is the single most effective strategy. This requires early planning -- the earlier you start, the more 10-year cycles you can complete.
Strategy 2: Gift with Usufruct Retention
A donor can gift real estate while retaining a usufruct (Niessbrauch) -- the right to use the property or receive rental income for life. The value of the usufruct is subtracted from the gift value for tax purposes, significantly reducing or even eliminating the gift tax. The donor retains the economic benefit of the property during their lifetime, while the heir eventually receives it at a reduced tax cost.
Strategy 3: Involving Intermediate Family Members
If a grandparent wants to transfer wealth to a grandchild, the tax is more efficient if the wealth first passes to the child (400,000 EUR allowance) and then from the child to the grandchild (another 400,000 EUR allowance), rather than directly from grandparent to grandchild (only 200,000 EUR allowance). This chain gifting strategy can significantly multiply the available allowances, though each step requires genuine economic transfers.
Strategy 4: Legacy Instead of Direct Inheritance
In a will, including bequests (Vermaechtnis) alongside the main inheritance can help distribute the estate among multiple beneficiaries, each of whom then uses their own personal allowance. For example, rather than leaving everything to the surviving spouse, specific assets can be bequeathed directly to children, making use of both the spousal and the children's allowances.
Strategy 5: Marriage for Tax Purposes
While this may seem extreme, the difference between a married and unmarried partner's inheritance tax treatment is dramatic: 500,000 EUR allowance and Tax Class I rates versus 20,000 EUR and Tax Class III rates. For long-term partners with significant assets, a late-in-life marriage can save hundreds of thousands of euros in inheritance tax.
The Berlin Will: A Tax Trap to Avoid
The Berlin Will (Berliner Testament) is Germany's most popular form of joint will, in which spouses name each other as sole heirs and their children as final heirs (Schlusserben). While this provides maximum security for the surviving spouse, it is a tax disaster.
The problem is straightforward: when the first spouse dies, the entire estate passes to the surviving spouse, and the children receive nothing at that point. This means the children's allowances (400,000 EUR each) go completely unused at the first death. When the surviving spouse later dies and the children finally inherit, they can only use their allowances once against the now-larger combined estate.
A better alternative is to include bequests (Vermaechtnis) in the will that allow the children to claim assets up to their allowance limits at the first death, while still ensuring the surviving spouse retains control and use of the assets. This approach preserves the protective intent of the Berlin Will while utilizing the children's allowances at both deaths.
Reporting Obligations and Deadlines
Every inheritance or significant gift must be reported to the competent tax office (Erbschaftsteuerstelle) within three months of the event. Banks, insurance companies, and notaries also have reporting obligations, so the tax office will generally learn of the transfer even without the heir's report.
After receiving the tax assessment notice (Steuerbescheid), the heir has four weeks to pay. If the inheritance consists primarily of illiquid assets such as real estate, a deferral (Stundung) of up to 10 years can be requested if immediate payment would cause significant hardship.
It is also possible to file an objection (Einspruch) within one month if you believe the assessment is incorrect -- for example, if the property valuation is too high or if the wrong tax class was applied.
Practical Example: A Family Inheritance
Consider a married couple with two adult children. The husband dies, leaving an estate valued at 1,200,000 EUR consisting of a family home (valued at 600,000 EUR and under 200 sqm), a bank account of 400,000 EUR, and household goods of 200,000 EUR.
The wife inherits everything under a standard will. Her personal allowance is 500,000 EUR, plus a maintenance allowance of 256,000 EUR (assuming no survivor's pension), plus 41,000 EUR for household goods. The family home is completely exempt under the Familienheimbefreiung if she continues living there for 10 years. So her calculation is: 1,200,000 minus 600,000 (family home exempt) minus 500,000 (personal allowance) minus 256,000 (maintenance) minus 41,000 (household goods) = negative, meaning zero tax.
Now consider the alternative: if the husband had left everything to the children instead, each child would receive 600,000 EUR. After the 400,000 EUR personal allowance, each child has a taxable amount of 200,000 EUR in Tax Class I, resulting in a tax rate of 11% and a tax bill of 22,000 EUR per child, or 44,000 EUR total. The family home exemption could still apply to one child if they move in for 10 years.
This example illustrates why proper estate planning -- potentially using a combination of spousal inheritance and children's bequests -- is essential for minimizing the total tax burden across both deaths.
Conclusion: Plan Early, Plan Smart
German inheritance tax can take a significant bite out of your estate, but it is also one of the most plannable taxes. The combination of generous personal allowances, the 10-year gift renewal rule, real estate exemptions, and business asset exemptions provides numerous legal tools for reducing or eliminating the tax burden. The key is to start planning early, understand the rules thoroughly, and ideally work with a qualified tax advisor (Steuerberater) or estate planning attorney (Fachanwalt fuer Erbrecht) to structure your transfers optimally.
Use our inheritance tax calculator to model different scenarios and see exactly how much tax would apply to your specific situation. Whether you are planning a gift or anticipating an inheritance, understanding the numbers is the first step toward smart estate planning.