Should someone be in a situation where they receive a valuable gift from a relative or friend or a large inheritance is left behind for them, they might be wondering who they have to inform about this and how it will affect their future finances. How much does the tax office (Finanzamt) need to know? We’ll explain everything here.
Disclosing unexpected income
The tax office should be notified as soon as possible after receiving an inheritance or gift of high value (money, apartment, house, etc.) – as soon as you are made aware of the gift/inheritance, you have 3 months to report this to the proper tax authorities so that the tax office can determine if tax is due on it. In the case of gifts, both the doner and receiver must inform the appropriate tax office. Inheritances and gifts are regulated by the same law (Inheritance and Gift Tax Act, ErbStG) and are subject to the same amount of taxes.
When reporting your inheritance/gifts to the tax office, you must provide the following information:
- Name, profession, tax-ID, address of both the heir/testator or doner/receiver
- Date of gift or date/place of testator’s death
- Value of inheritance/gift
- Legal basis of inheritance/gift (for example from a will)
- Relationship between the heir and testator/doner (e.g. degree of kinship)
- Information on previously received gifts (according to type, value, date of receival)
Good to know: You do not need to notify the tax office if you receive inheritance from a will that has been opened by a court or notary and if no business assets, foreign assets, shares in corporations or real estate is being transferred. You don’t have to notify the tax office yourself if a notary/court is involved in transferring a gift.
Failure to inform the tax office
Even when they are not informed, the tax office can find out about your inheritance/gift through a number of possible methods. Registry offices (Standesämter) are required to inform them of any deaths, banks report any money and/or valuables left behind in accounts or safe deposit boxes, and notaries/courts report relevant and important certifications.
Inquiries from the tax office
If the tax office suspects tax evasion, they can request more detailed information – even an initial suspicion is enough to legally justify this. For example, if the tax office sees a difference between your existing assets and what was declared on your tax return, they can legally make inquiries to determine the actual values. If one has concealed their assets and the tax office isn’t able to determine their taxes/can only determine them with a delay, it could lead to a penalty.
Important: If a testator has evaded taxes, their heir becomes liable for it. Any heir that suspects tax evasion should report this to the tax office immediately.
How can I prove my inheritance?
Gifts simply become legal through asset transfers and must be reported to the tax office. Inheritance, on the other hand, is slightly more complicated, as the testator can longer act on their own – only a certified notarized will (Testament), a handwritten will opened by the court, legal succession (gesetzliche Erbfolge), or an inheritance contract (Erbvertrag) can be documented and provided as proof of inheritance. An inheritance certificate (Erbschein) is needed if no will or contract is available, or if real estate property must be transferred – this certificate suffices as proof for the entitled heir.
Keep in mind: Applying for the inheritance certificate automatically accepts the inheritance.
Declaring gifts/inheritance on your tax return
Generous tax allowances are granted depending on the degree of the heir/testator’s relationship as well as the value of the gift/inheritance – taxes must only be paid on values that exceed the tax-free allowance. By requiring that heir’s and gift receivers report their inheritance, the tax office ensures that they have all the necessary information to determine whether an inheritance/gift tax return is required. Therefore, you can leave it up to the tax office to determine whether the value of your inheritance exceeds the exemption allowance.
What kind of tax has to be paid on inheritance and gifts?
Inheritance/gift tax (Erbschaft-/Schenkungsteuer) is levied on inheritances and gifts that exceed certain exemption allowances. If tax is due on your inheritance/gift, it must be paid upon receival – luckily, the exemption allowances are remarkably high, so most of the time no tax is due.
To summarize what we’ve covered in this article, here are a few important points:
- Gifts and inheritances are generally regulated the same way (according to the Inheritance & Gift Tax Acts)
- The amount of tax due on inheritance/gifts depends on the value and degree of kinship between testator and heir
- There are tax-free allowances for inheritances and gifts. These can be claimed every ten years.
- If one receives a gift, both the doner and receiver are required to notify the doner’s local tax office within three months. Of course, when receiving an inheritance, only the heir can inform the tax office.