German inheritance tax is charged to each person who receives assets from someone who has died, not to the estate as a whole. Spouses can inherit up to €500,000 tax-free and children up to €400,000 before progressive rates between 7% and 50% start to bite, and the rate you pay depends on how closely you were related to the deceased. Two heirs receiving equal shares from the same estate can end up owing very different amounts, which is why the German system rewards close attention to relationships, allowances, and the way individual assets are valued.
Who Owes the Tax
Whether you owe anything to the German tax office depends almost entirely on where the deceased and the heir were living at the time of death. If either person had a permanent home or habitual residence in Germany, the entire worldwide estate falls under German tax. This is called unlimited tax liability, and it applies regardless of where the assets themselves are located.
If neither person was a German resident, only assets located in Germany are taxed. Real estate, business interests, and certain financial holdings tied to the German economy sit inside that net. A foreign heir who has never set foot in Germany can still owe tax on a Berlin apartment or a commercial property they inherit.
Germans who move abroad face a longer reach than most expect. German nationals who leave the country can remain subject to unlimited tax liability for up to five years after emigrating. Under the US-Germany estate tax treaty, that window stretches to ten years for those who relocate to the United States. Changing your address does not immediately sever the connection.
Tax Classes
Germany sorts heirs into three tax classes based on their relationship to the deceased. Your class determines both your tax-free allowance and the rate you pay on anything above it.
- Tax Class I: spouses and registered civil partners, children and stepchildren, grandchildren, and (for inheritances only) parents and grandparents.
- Tax Class II: siblings, nieces and nephews, step-parents, parents-in-law, children-in-law, divorced spouses, and parents or grandparents receiving a lifetime gift rather than an inheritance.
- Tax Class III: everyone else, including unmarried partners, friends, charities, and corporations.
The parent-and-grandparent split catches people off guard. If your parent dies and you inherit, your grandparents count as Class I. If a grandparent gives you a gift during their lifetime, they are treated as Class II, with higher rates and a smaller allowance.
Personal Allowances
Before any tax applies, each heir subtracts a personal allowance from what they received. The thresholds are generous for close family and minimal for everyone else.
- Spouse or civil partner: €500,000
- Children and stepchildren: €400,000
- Grandchildren: €200,000
- Parents and grandparents (inheritance only): €100,000
- All Class II and Class III heirs: €20,000
The gap between €400,000 for a child and €20,000 for a sibling or friend drives much of the estate planning done in Germany. An unmarried partner inheriting €300,000 would pay Class III rates on €280,000; a child inheriting the same sum would owe nothing.
Maintenance and Household Allowances
Surviving spouses and children under 27 qualify for an additional maintenance allowance on top of the personal allowance. For spouses this can reach €256,000. Children receive a sliding-scale amount that decreases as their age at the time of the parent’s death rises. The maintenance allowance is reduced by any pension or survivor’s benefits the heir already receives from the deceased, so its full value is available only where no such payments exist.
Class I heirs can also receive household goods worth up to €41,000 tax-free. All heirs, regardless of class, can receive personal items like jewelry worth up to €12,000 tax-free. For Class II and III heirs, the household goods exemption is also capped at €12,000.
Tax Rates
After allowances are subtracted, the remaining inheritance is taxed at progressive rates that depend on both the amount and the tax class.
- Up to €75,000: 7% (Class I), 15% (Class II), 30% (Class III)
- Up to €300,000: 11% (Class I), 20% (Class II), 30% (Class III)
- Up to €600,000: 15% (Class I), 25% (Class II), 30% (Class III)
- Up to €6 million: 19% (Class I), 30% (Class II), 50% (Class III)
- Up to €13 million: 23% (Class I), 35% (Class II), 50% (Class III)
- Up to €26 million: 27% (Class I), 40% (Class II), 50% (Class III)
- Over €26 million: 30% (Class I), 43% (Class II), 50% (Class III)
Class III heirs face the steepest burden. The rate is a flat 30% on taxable amounts up to €600,000, then jumps to 50% on everything above that threshold. A friend inheriting €1 million would owe roughly €248,000 after applying the €20,000 allowance.
German law includes a smoothing rule to soften results when a taxable inheritance just crosses into a higher bracket. In those cases the effective marginal rate is capped so that a small increase in value does not produce a disproportionate jump in tax.
Family Home Exemption
A surviving spouse can inherit the family home entirely tax-free, with no cap on value or square footage. The condition: you must actually live in the home and keep living there for at least ten years after your spouse’s death. Move out earlier and the exemption is revoked, with tax due retroactively.
Children can inherit the family home tax-free as well, but with tighter limits. The exemption applies only to living space up to 200 square meters, and the child must move in and stay for ten years. Any square footage above 200 meters is taxed normally. In both cases an exception applies where the heir cannot maintain the home for compelling reasons, such as moving to a care facility.
Deductions From the Taxable Estate
Before allowances and rates are applied, the value of the inheritance is reduced by certain deductible costs. The most common are the deceased’s outstanding debts at the time of death, funeral expenses, and administration costs such as probate fees, executor compensation, and legal expenses.
For funeral costs, the tax office allows a flat deduction of €10,300 without receipts. If actual expenses exceeded that figure, you can claim the higher amount with documentation. This flat deduction covers burial costs, the memorial service, and the gravestone.
Business Asset Relief
Inheriting a family business or shares in a closely held company triggers special rules designed to keep the business running. Business assets can qualify for either 85% or 100% relief, and both options come with conditions.
The standard 85% exemption requires you to hold the business for at least five years. During that period the total wages paid to employees must reach at least 400% of the average annual payroll from the five years before the transfer. If you sell the business or fall short on payroll, you lose a proportional share of the exemption.1Bundesverfassungsgericht. Current Structure of Privileges for Business Assets Under the Inheritance and Gift Tax Act
The optional 100% exemption raises the bar to a seven-year holding period and a payroll threshold of 700%. Businesses with 20 or fewer employees are exempt from the wage requirements entirely, which matters for smaller family operations.
If you cannot pay the inheritance tax on a business without selling it, you can apply for a deferral of up to seven years. The first year is interest-free, with interest accruing after that. A similar deferral of up to ten years is available for inherited residential rental property and owner-occupied homes when the heir would otherwise need to sell to cover the tax.2Finanzämter in Baden-Württemberg. Can Inheritance and Gift Tax Be Deferred?
The 10-Year Gift Aggregation Rule
Germany does not let you avoid inheritance tax by giving away assets shortly before death. Under § 14 of the inheritance tax law, all gifts from the same person within the ten years before death are added back to the inheritance and taxed together. The personal allowance applies to the combined total, not separately to each transfer. If you received €300,000 in gifts over the previous decade and then inherited €200,000, tax is calculated on €500,000 minus your allowance, not on each piece individually.
Any gift tax already paid during that ten-year window is credited against the inheritance tax bill, so the same money is not taxed twice. Once a gift is more than ten years old, it drops out of the calculation entirely. This is why many German families begin transferring wealth early and in stages, resetting the allowance clock every decade.
How Real Estate Is Valued
Real estate is usually the most contested element of a German inheritance tax assessment, because the valuation method drives the tax. The Valuation Act prescribes three approaches, and the tax office picks the one that fits the property type.
- Comparative value approach: used for condominiums and single-family homes where recent sales of similar properties provide reliable data.
- Income capitalization approach: used for rental properties and commercial real estate, based on expected net rental income adjusted for the building’s remaining useful life.
- Replacement cost approach: used for special-purpose properties or where the other methods do not work, estimating rebuild cost less depreciation, plus current land value from official reference tables.
The tax office’s valuation often overshoots actual market value, especially for older properties or those in unusual locations. If you believe the official figure is too high, you can commission a certified independent appraisal and submit it to challenge the assessment. The report must follow recognized valuation standards and include a detailed property description, market data, and a clear methodology.
Filing and Payment
You must notify your local tax office of an inheritance within three months of learning about it. The initial notification is a brief statement that you received something, not a full accounting of assets and values.3BayernPortal. Inheritance or Gift; Notification to the Tax Office Banks, insurance companies, and probate courts are also required to report transfers, so the office usually knows about the inheritance before you file.
The tax office will then send you a formal request to file the inheritance tax return, the Erbschaftsteuererklärung. You can submit it by mail or electronically through the ELSTER portal. The return requires a complete inventory of assets at fair market value as of the date of death, a list of deductible liabilities and costs, and documentation of your relationship to the deceased.
Once the return is processed, the tax office issues an assessment notice, the Steuerbescheid, specifying the tax owed and a payment deadline that is typically one month from the date of the notice. Missing that deadline triggers interest charges. Late or missing filings can also attract surcharges on top of the interest.
Two things trip people up. Gifts received from the deceased within the prior ten years must be reported, because they are aggregated with the inheritance; leaving them out produces an incorrect calculation and potential penalties. And real property valuations are preliminary. If you plan to challenge one with an independent appraisal, build that into your timeline before the payment deadline hits.
Cross-Border Inheritances and the US-Germany Treaty
When an inheritance crosses borders, both countries may try to tax the same assets. The United States and Germany signed a treaty specifically to address this, formally titled the Convention for the Avoidance of Double Taxation with Respect to Taxes on Estates, Inheritances, and Gifts.4German Missions in the United States. Double Taxation: Estates, Inheritances, Gifts
For real property the rule is straightforward: real estate is taxed by the country where it sits. A German apartment inherited by an American heir is taxed by Germany; a Florida house inherited by a German heir is taxed by the United States.
For movable assets such as bank accounts and investments, the treaty uses a domicile test with a hierarchy of tiebreakers: permanent home, then center of vital interests, then habitual residence, then citizenship. If someone was a citizen of only one country but had residences in both, and had lived in the second country for no more than ten years, domicile is assigned to the country of citizenship.5U.S. Department of the Treasury. US German Estate and Gift Tax Protocol
The treaty also gives meaningful relief to surviving spouses who are not US citizens. The US estate tax marital deduction is normally restricted when the surviving spouse lacks US citizenship. Under the treaty protocol, the estate of a person domiciled in Germany receives a proportional unified credit against US estate tax, and a full marital deduction is available if the executor elects it and meets certain conditions. The treaty covers federal taxes on both sides only, not state-level estate or inheritance taxes in the US.
For countries without a tax treaty with Germany, double taxation relief is handled unilaterally. Germany generally allows a credit for foreign inheritance taxes paid on assets located abroad, but the mechanics are less favorable than under a treaty. Cross-border inheritances involving a non-treaty country almost always warrant professional advice.