When you accept an inheritance from a deceased family member or friend, you will have to pay inheritance tax on the estate. The sums involved are frequently higher when the inheritance involves properties. But how is inheritance tax calculated and what do you need to be aware of?
Once an heir receives notification of the amount of inheritance tax they need to pay, the financial authorities demand immediate payment of the tax liability. In the case of larger sums of money, this is often infeasible. That is because the sums involved frequently exceed the tax-free allowance. People with insufficient savings are therefore often left with little choice but to sell the inherited property in order to cover their inheritance tax bill. When you inherit a property, it is advisable to consult an expert in the form of an estate agent.
What to do when you can’t immediately cover the inheritance tax
In the event of a large inheritance tax bill, people are often unable to pay the whole sum at once and, above all, immediately. The financial authorities are therefore willing in some cases to provide a deferment. This is essentially an extension of the payment deadline. However, interest starts to accrue in such cases. Yet the financial authorities are also amenable to the negotiation of an extension of the costs. If the inheritance tax cannot be, or has not yet been, paid, the authorities have the right to issue a debt-securing mortgage on the property. The heirs may also find themselves confronted with a compulsory auction.
What is the tax-free allowance on an inheritance?
A person’s tax-free allowance depends on how closely related they are to the deceased. The more distantly they are related, the lower the tax-free allowance is. The children and spouse/civil partner of the deceased thus receive preferential treatment and are granted a higher tax-free allowance. The allowance for spouses/civil partners is EUR 500,000. For children, this goes down to EUR 400,000.
Tax-free allowance on benefits
If, before their death, the deceased had been providing their life partner or their own child with financial support, said child or spouse receives further tax-free allowances. Spouses receive a tax-free allowance on benefits of EUR 256,000. Different regulations apply for children. If both parents are deceased, the tax-free allowance depends on the child’s age. Stepchildren, adopted children and grandchildren can then also receive tax-free allowances. The younger the child, the greater the allowance.
Calculating inheritance tax
The calculation used to determine the amount of inheritance tax due is based on the date of the testator’s death. In the case of properties, the financial authorities base the tax calculation on the recorded market value. To this end, the property’s market value on the date of the testator’s death is established by a surveyor. If the property is let, only 90 per cent of the market value is used for the calculation.
The calculation is also based on the sales prices submitted to the financial authorities by the regional notary’s office, though only those prices received by the notary up to the date of death. Another key factor is the inheritance tax bands, which should not be confused with the tax band allocated by the financial authorities. The inheritance tax band is based on the degree of kinship with the deceased.
Here, the first tax band is the cheapest. There are three tax bands in total. The closer the kinship between heir and testator, the better the tax band. As inheritances are generally highly complex affairs and disputes among heirs fairly common, we recommend obtaining the services of an estate agent to act as a property expert and mediator.
Do you have questions regarding your inherited property? Then please get in touch with us. We are happy to support and advise you.
In this text, the generic masculine is used for better readability. Feminine and other gender identities are explicitly included to the extent necessary for the statement.
Disclaimer: This article does not constitute tax or legal advice in individual cases. Please consult a solicitor and/or accountant to clarify the circumstances of your specific case.
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