GER: Inheritance Tax – Tax-Free Allowance for Grandchildren

Dec 6, 2024 Benn-Ibler Rechtsanwälte

If a grandchild inherits from their grandfather, can they claim the EUR 400,000 tax-free allowance available only to children? Yes, if the child’s grandfather's parent is no longer alive. But what if the parent simply renounced?

In the case at hand, the plaintiff's father had waived his legal right to inherit in favour of his own father, the plaintiff’s grandfather. Under civil law, the father was therefore deemed to have died and was not entitled to a compulsory portion. When the grandfather died, the plaintiff, i.e. his grandson, became the legal heir. The grandson therefore applied to the tax office for a tax-free allowance of EUR 400,000. This amount would only have been granted to him as a grandson if his father had actually died before him. However, the tax office only granted the applicant a tax-free allowance of EUR 200,000 – the amount to which he was entitled as the grandson of his deceased grandfather. His father was still alive, but had signed to renounce to inherit.

The action before the tax court was unsuccessful. The German Federal Fiscal Court has now agreed with the tax court and dismissed the plaintiff's appeal as unfounded.

The wording of Section 16(1) no. 2 alternative 2 ErbStG (Erbschaftssteuer- und Schenkungsgesetz, Inheritance Act and Gift Tax Act) which grants the higher exemption of EUR 400,000 under the circumstances specified therein, is unambiguous. It states that ‘children of deceased children’ are the beneficiaries of the higher exemption. The inheritance tax exemption rules are intended to favour the first generation of descendants (children). The family ties between grandchildren and great-grandparents are not considered as close, so the latter are granted a lower exemption of EUR 200,000. Only if the testator’s parents have already died does the law consider the grandparents to be responsible for the grandchildren’s upkeep and grant them the higher allowance of EUR 400,000.

It was not the lawmakers’ intention to extend the higher tax-free amount to children who, as in the present case, are only legally deemed to be deceased as a result of the submission of a renunciation of inheritance, but who are actually still alive at the time of a grandparent’s death.

BFH, II R 13/22 (31 July 2024)