Inheritance Tax on Property: Allowances, Valuation and the Family Home

When tax is actually payable on an inherited property

Inheritance tax does not arise automatically the moment you inherit a property. What matters is whether the value of what you inherit exceeds your personal allowance (Freibetrag). Only the portion above that threshold is taxed. This is governed by the Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG).

The level of your allowance and the tax rate depend on the family relationship in which you stood to the deceased. The closer the relationship, the higher the allowance and the lower the tax rate. There is also a special rule for owner-occupied residential property: the so-called family home (Familienheim) can, under certain conditions, pass entirely tax-free. These three levers – allowance, tax class and the family-home exemption – together determine whether and to what extent inheritance tax is payable.

The personal allowances by family relationship

The personal allowance is available to every heir and depends on their closeness to the deceased. It applies to the entire estate combined, not just to the property. Under Section 16 ErbStG the following amounts currently apply:

• Spouses and registered civil partners: 500,000 euros
• Children and stepchildren, as well as grandchildren whose parents have already died: 400,000 euros
• Grandchildren (whose parents are still living): 200,000 euros
• Parents and grandparents in the case of an inheritance: 100,000 euros
• Siblings, nieces and nephews, as well as all other heirs: 20,000 euros

An example: if a child inherits a flat worth 380,000 euros from a parent and nothing else, the acquisition remains entirely tax-free thanks to the 400,000-euro allowance. Important: these allowances can be used afresh every ten years – which is particularly relevant for lifetime transfers.

Tax classes and tax rates: how much is left of the rest

If the value of the estate exceeds the allowance, the excess amount is taxed. Which tax rate applies depends on the tax class under Section 15 ErbStG:

• Tax class I: spouses and registered civil partners, children and grandchildren, as well as parents and grandparents in the case of an inheritance
• Tax class II: siblings, nieces and nephews, children-in-law and parents-in-law, stepparents, as well as divorced spouses
• Tax class III: all other heirs, such as unrelated persons or distant relatives

Within each tax class the rate rises with the amount of the taxable acquisition (Section 19 ErbStG). In tax class I it starts at 7 per cent for amounts up to 75,000 euros and rises in stages to up to 30 per cent. In tax class II the range runs from 15 to 43 per cent, and in tax class III from 30 to 50 per cent. For close relatives the burden is therefore considerably lighter than for distant or unrelated heirs.

How the inherited property is valued – market value is what counts

For inheritance tax purposes the inherited property is assessed at its market value (Verkehrswert) – that is, the price achievable on the market at the time of inheritance. The Valuation Act (Bewertungsgesetz, BewG) sets out the method the tax office uses to determine this value:

• Comparative value method (Vergleichswertverfahren): mainly for flats and detached houses, where enough comparable sales are available
• Income value method (Ertragswertverfahren): for let residential and commercial properties, where the achievable rental income is the main focus
• Asset value method (Sachwertverfahren): where neither comparative nor income values can be applied, for example with certain owner-occupied houses

The tax office works with standardised flat-rate values. Since the Valuation Act was amended by the 2022 Annual Tax Act (Jahressteuergesetz 2022), these calculated values are often higher than before and thus lie closer to the actual market level. If the tax office applies a value that you consider too high, you are permitted to prove a lower actual value by means of a qualified valuation report. This is precisely where a well-founded, market-oriented assessment becomes valuable – more on that at the end of this guide.

The family home: tax-free for spouses and children

One of the most important exemptions concerns the owner-occupied family home (Familienheim), that is, the flat or house that the deceased occupied themselves until the end. Here the law distinguishes two cases (Section 13(1) no. 4b and 4c ErbStG):

• Spouses and registered civil partners inherit the family home tax-free – and indeed with no limit on the floor area. The condition is that they move in without delay themselves and continue to occupy the property themselves for at least ten years.
• Children (and grandchildren of deceased children) likewise inherit the family home tax-free, but here only up to a floor area of 200 square metres. Any portion beyond this is taxed under the general rules. They too must move in without delay themselves and continue to live there for at least ten years.

If owner-occupation is given up within the ten years without a compelling reason – for example through sale or letting – the exemption lapses retroactively. A compelling reason is, for instance, where a need for care makes living there oneself impossible. Whether the conditions are met in your case is best clarified with your tax adviser.

Notification to the tax office: the three-month deadline

You must, as a rule, notify the tax office of an inheritance within three months of learning of it (Section 30 ErbStG). An informal notification with the most important details is sufficient at first. The tax office then decides whether to request an inheritance tax return.

In many cases the tax office learns of the inheritance anyway – for example through the probate court or the land registry. If the value of the estate is clearly below the allowance, or if the family home is fully exempt, an assessment of tax often does not arise at all. Nevertheless: the duty to notify exists, and it is worth taking it seriously. In addition to the personal allowance, spouses and children are also entitled to a supplementary maintenance allowance (Versorgungsfreibetrag, Section 17 ErbStG), which can reduce the tax burden further.

Why the right value determines your tax

With inheritance tax, in the end almost everything revolves around a single figure: the market value (Verkehrswert) of the inherited property. It determines whether your allowance is exceeded and how high any tax will be. Precisely because the tax office works with flat-rate methods, a well-founded, market-oriented valuation can be worth real money – whether to question an inflated assessment or to base a sale decision on a realistic footing.

As an arm of Wolfgang Richter GmbH, we have been supporting owners and heirs in the Düsseldorf and North Rhine-Westphalia (NRW) market for more than six decades. Over the years a thriving network of more than 20,000 contacts has grown up, which helps us to assess the value of a property realistically and – where a sale is desired – to bring owners and suitable buyers together discreetly. You can obtain a well-founded valuation of your inherited property from us; in the event of a sale we will, if you wish, accompany you from the assessment through to the notary appointment. The binding tax classification of your individual case, by contrast, belongs in the hands of your own tax adviser.