Inheritance tax: The great fear about small inheritances

Are you about to inherit a million euros? Probably not. By the way, neither do I. In general, only just under half of Germans ever become an heir in their lifetime. And if so, the average amount inherited is 52,300 euros. This means that half of the heirs receive less than this amount, the other half more, according to figures from income researchers at the German Institute for Economic Research (DIW). They also say: Half of all inheritances go to the richest ten percent of the population. So there’s no reason to worry about the taxation of inheritances – you might think.

Nevertheless, there have been ongoing disputes about inheritance taxes for years. They will now also be an issue again in the election campaign. Because basically all parties agree that inheritance tax needs to be reformed. Some want to increase it, like the SPD. Others are calling for higher allowances, such as the Greens and the FDP. The Union wants to exclude home ownership. And the AfD wants to abolish the tax entirely. A current Forsa survey commissioned by the German Forum for Inheritance Law is now fueling the debate, because according to pollsters, just over half of German citizens say: inheritance tax should be abolished.

Where does this fear of the tax burden come from when the amounts inherited are so low and there are also tax allowances? The reason is: There is a paradox of concern when it comes to the subject of heirs.

Although very few citizens even expect an inheritance that would be taxable, an incredible number of people feel threatened by taxes. They would therefore rather eliminate the tax altogether than risk having to pay taxes on their inheritance themselves. Although even the reform approaches are currently moving in the direction of increasing the allowances to such an extent that estates of one million euros or more would only be taxed. That should be enough for almost all heirs in this country to remain tax-free. So where does the fear come from?

There are two thoughts that concern many people: Almost every second household in this country owns a property. Usually a self-occupied single-family home that will sooner or later be passed on from the older generation to the next. However, house and apartment prices have risen so much since 2010 that many seniors and their children fear that the takeover will not be possible without high tax payments. Which is often not true, but more on that later. In any case, many of those affected see the taxation of the family home as an infringement on their family autonomy.

This is where the second idea comes into play: Many see the taxation of inheritances as double taxation. After all, the assets were built up from income that had already been taxed. If the state then holds out its hand again during the handover, it will ask everyone who has laboriously built up property to pay twice, or so goes the popular opinion. The fact that this is not true from a tax perspective, because two different people are being taxed here – the one who builds up the wealth and the other the person who takes it over – is something that fades into the background from the perspective of normal citizens. For them, shared family property is the decisive criterion, and not the question of who currently owns this property.

This is all very understandable, but you also have to know that with the current allowances, children can take on 400,000 euros tax-free, and spouses can even take on 500,000 euros. Grandchildren another 200,000 euros per head. So if one parent dies in a family and there are two children, the family home remains tax-free up to a value of 1.3 million euros if all three are beneficiaries. Ok, they then form a community of heirs and would have to agree on what should happen to the house. That is usually the bigger hurdle.

If the house value is higher, only the amount above 1.3 million euros would be taxed. With a property value of 1.6 million euros, eleven percent taxes would have to be paid on the excess 300,000 euros. That’s 33,000 euros. But even these can be avoided:

Even a single person could inherit the expensive house tax-free, provided it has a maximum of 200 square meters of living space – he would just have to move in there himself. And live in it for at least ten years. The handover of the family home to owner-occupiers is already possible tax-free, even far beyond the tax allowances. Almost everyone would probably welcome it if these exemption limits were actually increased in view of the doubled property prices.

Families who have very expensive properties in cities where their children do not want to live are currently having problems. These heirs then pay taxes when they sell or rent the home. Unmarried couples and those without children also have problems because only the measly allowance of 20,000 euros applies to non-spouses and all other subordinate heirs. As well as basically everyone who hasn’t made a will – that’s around two-thirds of adults in this country. The notary could clarify in good time how larger inheritances should be divided later. And in the vast majority of cases there are ways to make clever use of the allowances. Also through early donations.

But the real inheritance problem lies in the following numbers: According to statistics, the “bottom” 40 percent of German citizens in this country have no assets or even debts. The “middle 40 percent”, i.e. the members of the middle class, have around 40 percent of the values ​​in this country. That sounds neat, but: The “top” ten percent of the richest hold the remaining 60 percent of the total assets. Especially in the form of company investments. And in contrast to real estate assets, the immense business assets are often transferred to successor generations without those involved paying taxes on them. The DIW notes that this is increasingly being done to minors.

So far, the following applies: If your assets are worth double-digit millions, heirs generally pay no taxes at all or pay tiny single-digit rates. While normal citizens on average pay almost ten percent of middle-class inheritances, the network breaks down tax justice. All in all, this leads to wealth inequality becoming even worse. Because large fortunes accumulate at the top of the social pyramid over generations. While the middle class – when things go badly – ​​pay taxes and the lower half has none of that.

This shows that inheritance tax is in urgent need of reform. Anyone who is afraid of their own inheritance should not demand the abolition of inheritance tax, but should actively do four things: 1. Draw up a will. 2. Transfer houses to those who want to live in them. 3. Consider grandchildren. 4. And maybe get married after all.