I. Regulatory system

The aforementioned tax exemptions are governed by Section 13 (1) no. 4 a), b) and c) of the German Inheritance Tax Act (ErbStG). While item a) relates to the acquisition of a family home on the basis of an inter vivos donation, item b) and c) relate to certain cases of acquisition on account of death. Item b) favors the surviving spouse or partner. Item c), on the other hand, refers to an inheritance from the testator’s children or grandchildren.

II. Background of the tax exemption

According to the legislator, Section 13 (1) no. 4 a) Inheritance Tax Act fulfills the purpose of ensuring the exemption of family gifts from gift tax. The provision became necessary because the BFH, in a change in case law, decided in a ruling dated March 2, 1994 (II R 59/92) that an “unnamed (marriage-related) gift” generally triggers a gift tax liability.
Item b) and c) were included in the law in order to ensure the protection of the family environment. Since a lesser bond is generally assumed between parents and their adult children, the tax exemption under Sec. 13 (1) no. 4 c) Inheritance Tax Act is subject to additional conditions.
The change in the law was made in conjunction with the financial crisis of 2008. The tax exemption is intended to preserve assets within the family. It reduces the risk that the inherited property will have to be sold due to a high inheritance tax burden.

III. The central concept of the “family home“

The term “family home” is central to all groups of cases of tax-privileged transfer. The inheritance tax guidelines (Erbschaftsteuer-Richtlinien) on Section 13 (1) no. 4 a) Inheritance Tax Act specify this requirement.
The actual use of the building as a dwelling is decisive; a corresponding dedication as a family home is not relevant. In order to be able to claim the benefit of the respective tax exemption, the main part of family life at this location is decisive. A taxpayer cannot hold several family homes at the same time. In addition to classic single-family houses, residential and part-ownership are favored as well.
In the case of mixed use, the tax exemption is limited proportionately to the area used as a dwelling in the aforementioned sense. This can be concluded from the wording of the law (“insofar as“).
The tax exemption also extends to family homes located within the European Union or the European Economic Area.

IV. Lifetime gift to spouse

The lifetime gift to spouses is not subject to any further requirements. The decisive factor for the application of the tax exemption is that the donated property is used as a family home before and after the gift.
The question of whether the spouses must live together for the tax exemption to apply or whether living separately is sufficient is not clearly regulated. Particularly against the background of the purpose of the law, cohabitation is arguably to be required, as this is the only way to ensure the protection of family cohabitation in this case.

V. Acquisitions on account of death

For the benefit of acquisition upon death further requirements exist.
First of all, the decedent must have used the family home as such. Then, the heir must use the family home as such “immediately” (unverzüglich) after the inheritance. The case law allows the taxpayer a period of six months. This use must be maintained for a period of ten years from the acquisition, Section 13 (1) no. 4 (b) sentence 5, (c) sentence 5 Inheritance Tax Act. If the corresponding use is abandoned within this time period, the heir must pay the entire tax burden in arrears. There is no pro rata exemption depending on how many years the family home was still used as such.
According to the wording of the tax exemption, it should be irrelevant if a new partner moves into the “former” family home, provided that the heir occupies the home for at least ten years.
Acquisition by reason of death by children and grandchildren is favored to a living area of 200 sqm, Section 13 (1) no. 4 c) Inheritance Tax Act. The area figure is to be understood as an allowance, as there is always a pro rata consideration up to a maximum of 200 sqm. Thus, if the family home with a living area of 300 sqm is acquired upon death, inheritance tax is only due for 100 sqm.

VI. Exception of “ten-year-period”: unreasonableness of use for own residential purposes

In the case of an acquisition upon death, the tax exemption also applies if there are compelling reasons that preclude self-use for own residential purposes. This impossibility must exist with regard to use by the decedent before or by the heir after the inheritance. If the impossibility of use by the heir should cease again within the ten-year “commitment period”, the heir must resume residential use without delay. Otherwise, subsequent taxation will be levied.
Cases of health restrictions in particular have emerged as a case of application. The death of the heir within the 10 years also does not trigger subsequent taxation, but a further transfer which in turn is relevant for inheritance tax. Section 13 (1) no. 4 c) Inheritance Tax Act also covers cases where children are not yet able to run their own household due to their age. Occupational changes are generally considered to be reasonable. Since in most cases they are based on the taxpayer’s own decision of will, the subsequent taxation is triggered. This will be different if objective reasons cause the change of location. It must therefore be regularly examined whether the decision to no longer use the family home as such is based on objective, “external” reasons or “internal” motives of the taxpayer.
The above-mentioned ruling is linked to this feature. It was based on a case in which the taxpayer moved out of the previously jointly occupied house within ten years of her father’s death and also demolished it. In particular, the BFH is of the opinion that an exceptional case only exists if the acquirer of a inheritance tax privileged family home is prevented from using it for own residential purposes out of compelling reasons, if the self-use is objectively impossible or unreasonable for objective reasons. Considerations of expediency are not sufficient. Health impairments may constitute reasons if they make it impossible for the hier to live independently in the acquired family home.

VII. Final considerations for succession planning

Regarding the regulation described, some structuring considerations may arise. Section 13 (1) no. 4 a) Inheritance Tax Act is not subject to any further restrictions. Spouses can also transfer property back and forth. In cases of dispositions upon death, the legal consequences discussed occur automatically upon inheritance.
Therefore, with regard to the transfer of a family home, it makes sense to design a succession plan. The main advantage of a so-called anticipated succession will be that no ten-year commitment is provided for in the event of a lifetime transfer to the spouse. Thus, the gift tax favored real estate can be sold without restrictions.
In the area of the transfer of family homes to children or grandchildren, however, other considerations will be paramount, as there is no tax exemption for inter vivos gifts corresponding to Section 13 (1) no. 4 a) Inheritance Tax Act.