Inheritance and Gift Tax

What is inheritance and gift tax?

Inheritance and gift tax (German: Erbschaft- und Schenkungsteuer) denotes the tax on the transfer of assets without consideration, whether on death (von Todes wegen) or by gift during the donor's lifetime. The usual abbreviation is ErbSt. The legal basis is the German Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG). What is taxed is the enrichment of the recipient, that is, the value of the assets received after deduction of debts and burdens, reduced by personal allowances. Gifts are taxed under the same rules as inheritances. In simplified terms: the closer the family relationship, the higher the allowance and the lower the tax rate.

In business succession, the tax is often the largest single cost item of an intra-family transfer. It also affects founders who transfer shares to family members or a family company, and sales to relatives below market value, which are partly treated as gifts. Those involved are the donor or the deceased, the recipient, the tax office and the tax adviser; valuation follows the German Valuation Act (Bewertungsgesetz).

Tax classes, allowances and tax rates of inheritance tax

The law divides recipients into three tax classes according to their relationship to the donor or the deceased (Section 15 ErbStG). Tax class I includes spouses and registered civil partners, children and stepchildren, grandchildren and, for acquisitions on death, parents. Tax class II covers, among others, siblings, nieces and nephews, parents-in-law and children-in-law, and tax class III all other recipients.

A personal allowance is first deducted from every acquisition. Under Section 16 ErbStG it amounts, as of 2026, to:

• for spouses and registered civil partners: EUR 500,000
• for children and stepchildren and for grandchildren whose parent has already died: EUR 400,000
• for the other grandchildren: EUR 200,000
• for the other recipients in tax class I, such as parents on death: EUR 100,000
• for recipients in tax classes II and III: EUR 20,000

The allowances apply per pair of donor and recipient: a child can receive EUR 400,000 tax-free from each parent. On death, support allowances are added (Section 17 ErbStG). The surviving spouse receives EUR 256,000, and children up to age 27, depending on age, up to EUR 52,000, in each case reduced by tax-exempt pension benefits.

The tax rates under Section 19 ErbStG rise with the taxable acquisition, that is, the value after deduction of debts and allowances. In tax class I, as of 2026, the following apply:

• up to EUR 75,000: 7%
• up to EUR 300,000: 11%
• up to EUR 600,000: 15%
• up to EUR 6 million: 19%
• up to EUR 13 million: 23%
• up to EUR 26 million: 27%
• above that: 30%

In tax class II the rates are between 15% and 43%, in tax class III 30% or 50%. The rate applies in each case to the entire acquisition, not only to the part above a bracket limit. A hardship adjustment (Härteausgleich) softens the jump just above a limit.

Formula: inheritance or gift tax = taxable acquisition × tax rate; taxable acquisition = value of the assets minus debts and burdens minus tax exemptions and allowances, rounded down to full EUR 100

Ten-year period under Section 14 ErbStG

Several acquisitions from the same person within ten years are added together under Section 14 ErbStG. The allowance is thus granted only once per ten-year period but is available again afterwards. Anyone who transfers assets early and in stages can use allowances several times; this advantage cannot be made up if planning begins late.

Valuation of business interests under valuation law

Valuation law, above all the Valuation Act (Bewertungsgesetz, BewG), applies the common value (gemeiner Wert). It corresponds to the fair market value, that is, the price an unrelated buyer would pay in ordinary business dealings. For unlisted shares in corporations, it is to be derived primarily from sales between unrelated third parties that took place less than one year before the reference date. Otherwise it is determined taking earnings prospects into account or by another recognised method, at least at the net asset value, that is, the sum of the individual assets less the debts.

The statutory simplified capitalised earnings method multiplies the average annual earnings of the last three years by a fixed capitalisation factor (as of 2026: 13.75). For high-earning companies it often leads to values above a realistic market price. An expert opinion can then demonstrate a lower value.

For technology companies, a separate question arises. In a funding round, the company issues new shares against a contribution, usually with preferential rights for the investors. Whether this price serves as a yardstick for the founders' existing shares is disputed and depends above all on these preferential rights. A transfer shortly after a round with a high pre-money valuation can be expensive for tax purposes.

Relief for business assets

Eligible are business assets, agricultural and forestry assets and shares in corporations in which the donor holds more than 25% or which are bound through a pooling agreement. For these assets, the law grants the business relief (Verschonungsabschlag) in Sections 13a and 13b ErbStG. It is tied to two conditions. During a holding period, the recipient must not sell or give up the business or the shares. The second condition is a minimum payroll total, that is, a lower limit for wages and salaries during this period; easier rules apply to businesses with few employees.

• Standard relief: 85% of the eligible assets remain tax-free, with a holding period of five years and a minimum payroll total.
• Option relief: 100% tax exemption if administrative assets amount to at most 20%, combined with a holding period of seven years and a higher minimum payroll total.

Administrative assets such as rented-out property, securities and cash above certain limits are in principle not eligible. If they make up 90% or more, the relief is lost entirely. This particularly affects a holding company that holds mainly liquid funds after a sale. If the business is sold within the holding period, the relief is lost pro rata to time; if the payroll total is not met, in proportion to the shortfall. In both cases, additional tax is levied. Special rules apply to acquisitions of eligible assets above EUR 26 million.

As of October 2026, the Federal Constitutional Court (Bundesverfassungsgericht) is examining in two proceedings whether the personal allowances, the tax rates and the relief for business assets are compatible with the Basic Law (Grundgesetz). It is hearing the matter orally in October 2026; one of the proceedings goes back to an application by the Bavarian state government. Political reform proposals are also being discussed. Until a decision and any new legislation, existing law applies.

Worked example: gift tax on the transfer of GmbH shares

Simplified example: a mother holds 60% of a GmbH (German limited liability company) and gives these shares to her son. The tax value is EUR 4 million, administrative assets are immaterial, and there have been no earlier gifts. Standard relief is chosen.

• Business relief: 85% of EUR 4,000,000 = EUR 3,400,000
• Remaining value: 4,000,000 minus 3,400,000 = EUR 600,000
• Statutory deduction amount of up to EUR 150,000: reduced by half of the amount above EUR 150,000, that is, by EUR 225,000, and therefore lost entirely
• Taxable acquisition after allowance: 600,000 minus 400,000 = EUR 200,000
• Gift tax at 11% in tax class I: EUR 22,000
• For comparison without relief: (4,000,000 minus 400,000) × 19% = EUR 684,000
• With option relief: EUR 0, with a seven-year holding period and a higher payroll requirement
• Sale of the shares in the fourth year of standard relief: the year of the sale and the fifth year count as not complied with, 2/5 of the relief is lost, that is, EUR 1,360,000
• New tax: (600,000 + 1,360,000 minus 400,000) × 19% = EUR 296,400, so additional tax of EUR 274,400

The example shows why timing matters. The relief reduces the tax from EUR 684,000 to EUR 22,000; a sale within the holding period reverses a large part of this advantage. A further gift from the mother within ten years is added to this one; the allowance is then already used up.

Distinctions: inheritance tax, personal income tax and business relief

• Personal income tax on capital gains: arises for the seller on a sale for consideration. Inheritance and gift tax hits the acquisition without consideration in the hands of the recipient.
• Business relief (Verschonungsabschlag): the tax exemption for eligible business assets with its holding period and payroll rules.
• Usufruct (Nießbrauch): reservation of the income in a gift. Its capitalised value reduces the taxable acquisition, for relieved assets only proportionately.

Common mistakes

• Starting too late. Anyone who plans only shortly before the handover cannot use the ten-year period several times.
• Transfer shortly before a sale. The foreseeable purchase price determines the value, and a sale within the holding period triggers additional tax.
• Overlooking administrative assets. High liquidity or rented-out property in the company can restrict or exclude the relief.
• Deadlines not monitored. Holding periods and payroll totals must be complied with and demonstrated over years.
• Liquidity not planned. The tax must be paid in cash, even if the acquisition consists only of shares.
• Flat-rate value adopted unchecked. If the simplified capitalised earnings value is above the market value, an expert opinion can reduce the tax.

Frequently asked questions

Is a gift taxed in the same way as an inheritance?

Largely yes. Tax classes, allowances and tax rates are the same; support allowances exist only on death.

How high are the allowances for spouses and children?

As of 2026, they are EUR 500,000 for spouses and registered civil partners and EUR 400,000 for each child, per parent. On death, support allowances are added.

How often can the allowance be used?

Once per ten-year period and per pair of donor and recipient. After ten years have passed, it is available again in full.

Who owes the tax?

The recipient, and in the case of a gift the donor as well. If the donor bears the tax, the amount assumed is in turn treated as part of the gift.

Must a gift be reported to the tax office?

Yes. The acquisition must be notified within three months, in the case of gifts also by the donor. Notarised gifts are additionally reported by the notary.

Which tax office is responsible for inheritance and gift tax?

The responsible tax office is the one at the deceased's last place of residence or, for a gift, the one at the donor's place of residence (Section 35 ErbStG). Many federal states have concentrated processing at individual tax offices, Rhineland-Palatinate and Saarland, for example, at the tax office Kusel-Landstuhl; the responsible office is named by the respective state tax administration.

The Roemer Capital view

The tax calculation is done by the client's tax adviser. Our part is the economic calculation beforehand. We set a transfer before and after a funding round or a sale side by side and show how valuation, holding periods and liquidity needs change the result for the family.

In sale processes, we ask early about gifts of recent years. If a holding period is still running, additional tax reduces the net proceeds, and the timing of closing becomes an economic lever.