Tax-Free Gift – What Should You Know About It?

Do you want to leave your estate to your children or close relatives? Then you should consider making a lifetime gift. This allows you to avoid unnecessary family disputes over the inheritance, as you transfer it consciously and purposefully. Learn why this solution is so beneficial, what to consider when making a lifetime gift, and how it affects German taxes.

Tax-free Gifts to Third Parties – What are the Limits?

The prosperity of the German state is increasingly based on numerous and generous inheritances. According to research by the German Institute for Economic Research (DIW), currently around 400 billion euros are inherited and gifted annually. Other 

Estimates show that almost three-quarters of inherited assets are real estate, both houses and apartments. Heirs often argue about what to do with these:

• sell them to third parties and share the proceeds,
• use the property and pay out co-heirs.

Therefore, to avoid such unnecessary disputes, it makes sense to opt for a lifetime gift.

Tax-free Gift to Relatives – Why is Gifting Better than Inheriting?

In tax law, it has been emphasized for many years that gifting is definitely better and more advantageous than inheriting. This is because gifts between close relatives and dependents offer high tax benefits and help avoid unpleasant inheritance disputes in many cases. Those who consciously choose to give a gift can actively control and strategically plan the transfer of their own assets.

Gifts and Taxes – What Amount is Tax-Free?

Those who wish to leave their private estate to family members can save significantly on high German taxes through gifts. However, the formal requirements must be observed and the entire process carefully planned. In German gifts and inheritances, the same tax rules and rates apply. So it doesn’t matter whether it is gifted or inherited. However, there are certain peculiarities and design options that do not exist with inheritances. For example, the tax allowances for gifts “renew” every ten years. As a result, they can be used multiple times, which means that one can spare their children and close relatives unnecessary German tax payments.

When is a Gift Tax-Free?

In German tax relief, the rule is that they are generally sufficient for close relatives (children, spouses) to allow a tax-free gift. Here are some examples of family relationships in connection with tax-free gifts.

• Each parent can make a gift of four hundred thousand euros to their child every ten years without having to pay taxes on it. For a large part of the real estate that goes to descendants as inheritance or gift, this amount is sufficient to exclude a tax liability.
• Grandparents can leave two hundred thousand euros tax-free to their grandchildren every ten years. Spouses and registered partners can receive up to five hundred thousand euros in tax-free assets. Attention! In German tax law, there is a special regulation for spouses and registered partners when transferring property ownership – it is always tax-free and unlimited.
• Siblings, non-registered partners, and friends can expect a tax reduction of twenty thousand euros from the German tax authorities.

The Tax-Free Gift and the Amount of the Tax Allowance

The final amount of the tax allowance in Germany mainly depends on family relationships. It is important to know that this determines the tax class of the gift, according to which the recipient must pay taxes. For everything that exceeds the set allowance, the German tax office will demand its share of the gift according to the prescribed tax rates of the respective class. The principle: The more distant the degree of kinship, the higher the tax rate.

The Tax-Free Gift for Children and Tax Classes

Recipients of a gift in Germany must contend with two challenges:

• The tax allowance, which is associated with the rule that the amount of the allowance varies with the closeness of the relationship between the people involved.
• The tax class, whose favorability and attractiveness decrease with increasing distance of the kinship degree.

In light of these facts, the German tax authorities have decided to divide all matters related to gifts into three tax classes – Class I is definitely the most advantageous; Class III, on the other hand, the least. All classes are legally regulated in the Inheritance Tax Act (ErbStG).