UK Inheritance and the German Finanzamt

[Bayernfc]

Evening all.
After a post on FB I have been advised to ask here as Panda Munich will possibly know.
I have the following question:
5 years ago I was “gifted “ part of a house and my name entered on to the Land Registry.
The house was a gift with reservations as my mother didn’t pay rent before she passed and the 7 years were also not completed.
Now to my actual question/problem:
Will the German Finanzamt be able to see that the property was already partially in my name or will it simply be declared as an inherited property?
Due to several difficult circumstances I never got round to informing the Finanzamt about the house but since I have not had any financial gain I’m not sure if I’m worrying unnecessarily. What are your thoughts???

[alma.freya]

Due to several difficult circumstances I never got round to informing the Finanzamt about the house but since I have not had any financial gain I’m not sure if I’m worrying unnecessarily. What are your thoughts???

I received an inheritance in 2018 and didn't realise until 2022 that I may need to pay inheritance tax in Germany. Mainly because inheritance tax in the UK isn't paid by beneficiaries, rather by the estate.

I sent them the necessary form and paid the tax. There was no penalty, so providing you are proactive I wouldn't worry about that. Just let them know about the inheritance.

[Escafusa]

5 years ago I was “gifted “ part of a house and my name entered on to the Land Registry.

I have not had any financial gain

But clearly you have had financial gain as you have inherited an asset that is worth something.

[Bayernfc]

I’m not trying to avoid inheritance tax but would like to know if the German Finanzamt will even find out that the house was partially in my name before it was reinstated as part of the inheritance.
Financially I don’t think it makes any difference but I just don’t want to make the tax return next year more complicated than it needs to be and I don’t want a fine or to create any reason for the Finanzamt to delve deeper into the situation.
What I really need to know is will there be any mention of the ownership on the probate or will the paperwork simply state that I have inherited half of the house?
Hope this helps to understand my predicament.
Thank you for any info

[Bayernfc]

5 years ago I was “gifted “ part of a house and my name entered on to the Land Registry.

I have not had any financial gain

But clearly you have had financial gain as you have inherited an asset that is worth something.

But was it a financial gain if no money was made from it and it is now back into the inheritance pot ( whereby the tax is now due - or not because it is under the €400,000 tax free limit anyway).

[Escafusa]

But was it a financial gain if no money was made from it and it is now back into the inheritance pot ( whereby the tax is now due - or not because it is under the €400,000 tax free limit anyway).

Yes, it was still a financial gain as the property is listed in part under your name, so it is one of your assets and has a value. The fact that it now forms part of an estate and may or may not be subject to tax in the UK or in Germany is a separate matter. It has been your asset from the time it was listed under your name.

[Bayernfc]

So, the question is still, does anyone know if the German Finanzamt will be informed of the ownership of the house or does it just get handled as an inheritance?

[GaryC]

I’m not trying to avoid inheritance tax but would like to know if the German Finanzamt will even find out that the house was partially in my name before it was reinstated as part of the inheritance.
Financially I don’t think it makes any difference but I just don’t want to make the tax return next year more complicated than it needs to be and I don’t want a fine or to create any reason for the Finanzamt to delve deeper into the situation.
What I really need to know is will there be any mention of the ownership on the probate or will the paperwork simply state that I have inherited half of the house?
Hope this helps to understand my predicament.
Thank you for any info

The house (well, a share in it) was gifted to you at a point in the past and would have had a value at that time. That is not undone by the GRB IHT treatment, and the 7-year rule for Potentially Exempt Transfers (PETs) does not apply unless the reservation ceased more than 7 years prior to death, which clearly did not happen.

Legally, you own the house (or share of it) from the date it was gifted but because it was subject to a reservation at the date of death its value at that date must be included when valuing the Estate for IHT, i.e. "it is deemed to be property to which they" i.e. the deceased, "were beneficially entitled" at the date of death. Thus the hoped-for removal of the value of the house from the value of the Estate at the date of death, is unwound by what is, essentially, an anti-avoidance provision.

PandaMunich will opine but it seems to me that the time to report anything to the FA was the German tax year in which the gift was made, not the date of death as the gift had nothing to do with the date of death and legally, your ownership is unchanged by the death - you have not inherited any share of that property after the death.

Whether that gives rise to a charge in Germany will depend on the value of that gift. Quite how the deemed value at the date of death will be treated for German tax purposes will be interesting as it is, essentially, a UK IHT tax fiction.

[PandaMunich]

5 years ago I was “gifted “ part of a house and my name entered on to the Land Registry.
The house was a gift with reservations as my mother didn’t pay rent before she passed and the 7 years were also not completed.

First off, where you already living in Germany on the date of the gift?
If not, we can stop right here, because then you wouldn't have been subject to German gift tax.

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If you did live in Germany on the date of the gift, then according to German law, if your name was entered into the land register at that point, then it was gifted to you.

If your mother retained a legal right to continue to live there and to get the rent from it if she would have ever moved out (so not just you agreeing that she can stay on in the house rent-free), then the value of the gift would have been lowered by the value of this Vorbehaltsnießbrauch (= your mother retaining the usufruct of the property), maybe even below the 400k€ allowance for a gift parent-->child and then no German gift tax would have been due: https://www-rosepartner-de.translate.go ... r_pto=wapp

Now to my actual question/problem:
Will the German Finanzamt be able to see that the property was already partially in my name or will it simply be declared as an inherited property?
Due to several difficult circumstances I never got round to informing the Finanzamt about the house

Well, yes, if they ever get to see the date in the land register, they will see that it was in your name.

If your question is, whether you will get away with simply declaring that you inherited it now, and to then ask for a German income tax credit for the UK inheritance tax that you have to pay (which at 40% will "eat up" any German inheritance tax, since it is much lower) - yes, you probably would, as long as you do not get a Finanzamt caseworker who has had such "gift with reservation of benefit" case from the UK before: https://www.starckuberoi.co.uk/gift-wit ... eservation.

As her child, you would be in gift/inheritance tax class I and the maximum tax rate in class I is 30%, see § 19 ErbStG: https://dejure.org/gesetze/ErbStG/19.html

If you want to come clean about the gift 5 years ago, you can do a Selbstanzeige (through doing a Selbstanzeige, you avoid a criminal record).

But I see a hurdle:
With the UK now charging inheritance tax, and you actually owing [b]gift[/b] tax, you would worst-case have to go to court and win there in order to force the Finanzamt to give you that tax credit.

Because the tax credit that is foreseen in § 21 ErbStG is for UK inheritance tax to reduce German inheritance tax, and not German gift tax, it says "inheritance" tax everywhere in § 21 ErbStG: https://dejure-org.translate.goog/geset ... r_pto=wapp

But there is hope.
There has been a court ruling of the Düsseldorf Finance Court in 2022, in which lady got a German tax credit for her German gift tax, because of the Swiss inheritance tax that she had to pay.
Switzerland has a similar rule to the UK, if the person who gave the gift dies too early, within 5 years, they will charge Swiss inheritance tax on that gift.

Going by your user name, you live in Munich and there are no guarantees that the Munich Finance Court would rule the same favourable way as the Düsseldorf court did: https://der--betrieb-de.translate.goog/ ... r_pto=wapp

--> worst-case, by coming clean, you could end up paying both German gift tax and UK inheritance tax on the same UK house.

However, I think the Munich Finance Court would rule the same way the Düsseldorf Finance Court did.
And if it didn't, you could appeal and Germany's highest finance court, the Bundesfinanzhof would almost certainly rule in your favour.

A BFH ruling would apply to all Finanzämter, i.e. you would make life easier for your other Brits in your situation everywhere in Germany, by fighting this through to the BFH.

but since I have not had any financial gain I’m not sure if I’m worrying unnecessarily. What are your thoughts???

You got a house, a house you could have sold immediately, that is quite a financial gain.

I think I don't have to tell you that you committed German gift tax evasion 5 years ago.
Well, if you exceeded the 400k€ limit, you did.
Which is most probably the case, since you wouldn't be talking about UK inheritance tax if the house were worth less than the UK inheritance tax free allowance of 325,000 GBP.

[PandaMunich]

Paging @GaryC:

There is a thing I don't understand about this: https://www.thelawsuperstore.co.uk/prop ... 3650%2C000.

With the UK allowing a parent to gift a property to their child without British gift tax being due, and the parent then only having to survive for more than 7 years, as compared to saddling their child with 40%(!) UK inheritance tax if they don't survive these 7 years, why do British parents not simply gift the properties at an age where they will for sure survive these 7 years?

Yes, I saw that they then need to pay their child rent if they stay on in the house.
But that is still a bargain compared to 40% inheritance tax.
After all, that rent money will remain in the family (alright, HMRC will also get a bit of it in income tax).

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In Germany, the way to get the EU/EEA family home (if it has up to 200m² living space, if it is larger, only the first 200m² are exempt) from your parent without having to pay inheritance tax is a different one:
If, after inheriting it, you immediately move in and continue living in it for more than 10 years, then that family home is exempt from German inheritance tax under § 13 (1) 4c) ErbStG: https://dejure-org.translate.goog/geset ... r_pto=wapp

Ok, that may not be the ideal way of dealing with the problem, since the child has to continue living in it for more than 10 years.
But if they do manage that, no inheritance tax is due on the family home.

The ideal way would be transferring "slices" of that house and of any other assets throughout the child's life, i.e. each parent gifting the child 400k€ worth of assets every 10 years.
This is why wealthy German families start transferring assets the moment a baby is born and continue to do so every 10 years, i.e. every time the 400,000€ tax-free allowance for gifts in the direction parent-->child re-sets.

[GaryC]

Inheritance Tax is hideously complicated once you step out of the norm, i.e. once you try too avoid it, not to mention the juxtaposition with Capital Gains Tax, Income Tax and Stamp Duty Land Tax. What follows is stretching my knowledge but here's a starter for ten...

The starting point for IHT is that you can gift, and therefore remove from IHT, as much as you like as long as you live for at least 7 years - these are called Potentially Exempt Transfers (PETs). If you die within 7 years, some or all of the value comes back into the Estate.

People with an Estate likely to be worth less than £1,000,000 (including their main residence, if it is worth at least £350,000) when the second spouse dies, don't need to worry about gifting assets during their lifetime as there will be no IHT to pay on the estate anyway.

Those with an Estate worth more than that can gift assets as PETs, other than their main residence, free of IHT (assuming they live long enough), though Capital Gains Tax may arise on such gifts, depending on the nature of the asset, e.g. an investment property or stocks and shares would attract CGT on disposal in the same way they would if sold.

If a parent simply gifts their main residence, then any capital gain is likely to be fully covered by Private Residence Relief, meaning no CGT would be due on making the gift, and the property's value would be removed from IHT if they survive the gift by 7 years, i.e. initially the same as any other asset/PET. However, the donor(s) still needs to live somewhere and if that is in gifted property (as opposed, perhaps, to going into a care home) the Gift with Reservation of Benefit (GROB) anti-avoidance provisions come into play, and the additional £350,000 IHT Residence Nil Rate Band may, or may not, then be available (I had a quick look at this and am left with "may, or may not" in my head and life is too short!). If the property is still mortgaged then Stamp Duty Land Tax will also have to be considered and would be payable by the recipient(s) of the gift. I am not sure but the additional 3% charge for acquiring an interest in a second (or subsequent) property anywhere in the world, over and above the normal rate for the value concerned, may also apply.

Anyway, the GROB rules would require a market rent to be paid, otherwise the property is deemed to still be part of the Estate and the 7-year for PETs is irrelevant. The value for IHT is still that, at the date of death, but the acquisition cost for the new owner(s) is the (lower) value at the date the gift was made and, as I understand it, there is no relief for any "double" taxation that may arise - presumably because they are different taxes, charged on different persons, in different tax years! Also, a point I had forgotten about in earlier posts, is that unless a market rent is paid by the donor(s), the anti-avoidance Pre-Owned Asset (POA) charge may apply to impute an income tax charge on the donor based on a market rent for each year of their continued residence (the formula is as complex as one might expect for anti-avoidance legislation).

Rents in the UK are high, so could a parent, who owns their house, whether mortgaged, or outright, suddenly start paying their child(ren), up to perhaps, £2,000 per month for an average house, having already given the house to them, only for that rental income to be taxed at 20%/40%/45% on the new owner(s)? I would think not in most cases, even ignoring the psychology involved. The UK state pension is about £950 per month and even a good workplace pension might add only £2,000 to £3,000 to that before tax. So, even if the parents had £4,000 per month before tax, £3,400 after tax, could they give £2,000 to their child(ren)? Alternatively, would the donor(s) be content to face a POA income tax charge each year at their marginal tax rate "because they were kind to their children"?

I haven't run through the maths (not least because my brain is already hurting) but as a former counter-avoidance policy adviser, my guess would be that whose who developed the policies would have been looking to negate any hoped-for tax advantage, or perhaps go further to make entering into such arrangements positively unattractive... And, anyone entering into such arrangements without taking expensive professional advice would be foolhardy to say the least, and the complexity of the tax consequences probably deters all but the most determined from even considering it...

So, I guess that for most people this is in the too complex/too uncertain/too expensive given any potential tax saving box.

[Escafusa]

Yes, I saw that they then need to pay their child rent if they stay on in the house.
But that is still a bargain compared to 40% inheritance tax.
After all, that rent money will remain in the family (alright, HMRC will also get a bit of it in income tax).

If the child is not tax-resident in the UK, HMRC won't get anything, so even better.

[GaryC]

Sorry but income from immovable property, aka rental income is taxable in the UK under the double tax agreement AND feeds into Progressionsvorbehalt on your German tax return, thus increasing your German tax rate.

[PandaMunich]

Thank you, Gary.
The whole think is mind-boggling from a German tax perspective.

For example, just take the German "Fußstapfentheorie", which means that under German rules, you also get gifted/inherit the original purchase price and purchase date of an asset (be it a house or a batch of stocks/funds/bonds and so on).

With the UK charging capital gains tax (CGT) on the increase in value at the moment the asset gets gifted, if the recipient of the gift lives in Germany, that same increase in value will be double taxed, once by the giver of the gift in the UK and then again, when the recipient sells those shares here in Germany.
Why?
Because according to the "Fußstapfentheorie", I have to use the parent's purchase date and price.
--> the increase in value between the parent's original purchase date and the value on the date of the gift will be taxed twice, once by the parent in the UK and then again by the child in Germany
Though if that date is 2008 or earlier, the increase in value of the shares is not taxable in Germany.

There must be some provision in the double taxation agreement (DTA) to remove this double taxation, if all else fails through the mutual agreement procedure (Verständigungsverfahren) between Germany and the UK in article 26 of the DTA: https://www.bundesfinanzministerium.de/ ... onFile&v=3

Because it just isn't fair otherwise.

[Escafusa]

Sorry but income from immovable property, aka rental income is taxable in the UK under the double tax agreement

Only if you live in a country with such an agreement AND you declare it!

[PandaMunich]

Sorry but income from immovable property, aka rental income is taxable in the UK under the double tax agreement

Only if you live in a country with such an agreement AND you declare it!

You still haven't understood what a double taxation agreement does.
Without a double taxation agreement, both countries could tax that same income, i.e. there would be double taxation.
--> without a double taxation agreement, both the UK and your country of residence would tax that UK rental profit.

The double taxation agreement assigns the taxation rights on each type of income to either the one country or to the other country.
--> through it, double taxation gets avoided.

I don't know about the UK, but several countries ensure that they get the tax on rental income if the landlord is a non-resident, by making the tenant retain it from the rent he is supposed to pay.
The tenant then transfers that tax directly to the tax department.

For example, Canada does so: https://www.ggfl.ca/tenants-in-canada-a ... ing-taxes/

[Escafusa]

You still haven't understood what a double taxation agreement does.

Not sure who this was directed at but I certainly know what one does.

I don't know about the UK, but several countries ensure that they get the tax on rental income if the landlord is a non-resident, by making the tenant retain it from the rent he is supposed to pay.
The tenant then transfers that tax directly to the tax department.

Never heard of that and as far as I know it doesn't happen in the UK, at least not in my experience, so nothing really to worry about.

[GaryC]

PandaMunich is correct. If you are a non-resident UK landlord then you fall under the "Non-resident Landlords Scheme" - https://www.gov.uk/government/publicati ... -scheme-is

"The Non-resident Landlord Scheme (NRLS) taxes the UK rental income of people whose ‘usual place of abode’ is outside the UK.

A ‘letting agent’ includes anyone who manages property on behalf of a non-resident landlord.

Letting agents of a non-resident landlord must deduct tax from the landlord’s UK rental income and pay the tax to HMRC.

If the landlord does not have letting agent, you will need to operate the NRLS. If you’re a tenant who pays rent of £100 a week or less, you do not have to use the Scheme unless you’re told to do so by HMRC.

If you’re a letting agent, you must use the Scheme regardless of the amount of the rent you collect, even if it is £100 a week or less.

Read more information about the NRLS for:

letting agents
tenants"

I am beginning to think you should be seeking professional advice in both Germany and the UK before you get into a right mess.

[Escafusa]

you do not have to use the Scheme unless you’re told to do so by HMRC.

This is the key point!
And how would the tenant know the scheme even exists? We've never heard of it and we're the landlords! And why would a sitting tenant query a landlord's tax-residence?

I am beginning to think you should be seeking professional advice in both Germany and the UK before you get into a right mess.

Who should?

[GaryC]

Thank you, Gary.
The whole think is mind-boggling from a German tax perspective.

For example, just take the German "Fußstapfentheorie", which means that under German rules, you also get gifted/inherit the original purchase price and purchase date of an asset (be it a house or a batch of stocks/funds/bonds and so on).

With the UK charging capital gains tax (CGT) on the increase in value at the moment the asset gets gifted, if the recipient of the gift lives in Germany, that same increase in value will be double taxed, once by the giver of the gift in the UK and then again, when the recipient sells those shares here in Germany.
Why?
Because according to the "Fußstapfentheorie", I have to use the parent's purchase date and price.
--> the increase in value between the parent's original purchase date and the value on the date of the gift will be taxed twice, once by the parent in the UK and then again by the child in Germany
Though if that date is 2008 or earlier, the increase in value of the shares is not taxable in Germany.

There must be some provision in the double taxation agreement (DTA) to remove this double taxation, if all else fails through the mutual agreement procedure (Verständigungsverfahren) between Germany and the UK in article 26 of the DTA: https://www.bundesfinanzministerium.de/ ... onFile&v=3

Because it just isn't fair otherwise.

OMG!! The more we look at gift/inheritance taxes in the UK and Germany the more these sorts of complications come out of the woodwork. Add to that, the fact that Inheritance Tax is not actually covered by the UK/Germany DTA, so one has to fall back on domestic law or Unilateral Relief, of is there provision in the treaty that comes to ones assistance when gift/inheritance tax is involved?

I just found this HMRC page, which is interesting in this context https://www.gov.uk/guidance/inheritance ... ion-relief