Legal heirs who waive their compulsory portion and receive a form of compensation for doing so need to keep an eye on the tax burden. Following a judgment of the Bundesfinanzhof (BFH), Germany’s Federal Fiscal Court, this may turn out to be higher than was previously the case.
Even if legal heirs are excluded from inheriting by way of a will, they are still entitled to their share in the compulsory portion. Should those entitled to the compulsory portion waive this to the benefit of their siblings and receive compensation in return, this may prove to be considerably costlier than was hitherto the case following a ruling of the Bundesfinanzhof from May 10, 2017. According to this, a distinction needs to be made depending on whether the waiver was issued during the testator’s lifetime or after his or her death (Az.: II R 25/15). We at the commercial law firm GRP Rainer Rechtsanwälte note that the tax implications can be significant.
In the instant case, a brother had waived his entitlement to the compulsory portion during the lifetime of the testatrix in favour of his three siblings in case he was excluded from the inheritance by his mother. In return, he received a payment from each of his siblings in the amount of 150,000 euros. Several years prior to this, he had already received gifts from his mother amounting to around one million euros.
The tax office issued separate gift tax assessment notices for his siblings’ donations and in the process added the value of the of the mother’s gifts to the payment of 150,000 euros from each sibling, and then deducted the applicable tax allowance at the time of 205,000 euros. In doing so, it applied the first tax bracket to the case and thus a tax rate of 19 per cent. In the end, this resulted in a tax levy of 28,405 euros. The relevant assessment notice was adjusted following a legal action. This reduced the gift tax burden to 10,810 euros; the gifts from the mother ought not to have been taken into account for the purposes of the calculation.
Nonetheless, the fiscal court also applied the first tax class to the case. Wrongly so, according to the BFH. It held that because the donation was among siblings and not between parents and children, the considerably less favourable second tax bracket ought to have been applied to the case. The tax allowance here was then only 10,300 euros (20,000 euros today). This meant the gift tax rose again to approx.. 23,600 euros. The BFH has thus substantially amended its case law. Lawyers who are experienced in the field of succession law can offer advice.