§ 29 ErbStG leads to the expiry of gift tax and inheritance tax. There are enumeratively listed the cases in which there is an extinction. We explain which conditions must be met and what you need to pay particular attention to.

1. expiration of gift tax and inheritance tax

§ 29 ErbStG leads to the expiry of the gift tax and inheritance tax with effect for the past. The cases in which the tax expires are listed enumeratively.

In practice, the provision is of considerable importance, especially because of the provision in § 29 (1) no. 1 ErbStG. This provision makes it possible to reverse grants with fiscal effect. We have explained this extinction in one of our other contributions.

In addition, however, § 29 (1) no. 3 ErbStG is also of considerable importance. It allows the expiration of a gift tax arising between spouses. Spouses often misunderstand the character of the property regime of the community of profit as a separation of property with final compensation for profit. Rather, they interpret the legal property regime of the community of gain as one of the community of goods. Therefore, they are regularly not aware that grants among them constitute free grants within the meaning of § 7 (1) no. 1 ErbStG and thus trigger gift tax.

On the other hand, the provisions of § 29 (1) no. 2 and no. 4 ErbStG have rather little practical relevance.

2nd event of expiry of gift tax

2.1. Expiration of gift tax due to impoverishment (No. 2)

If, after completion of the donation, the donor cannot deny his adequate maintenance and cannot fulfill the legal obligation to his relatives, spouses or cohabiting partners, then he may demand the gift from the recipient. The gifted person can avert the delivery by paying the amount necessary for the maintenance. Then the tax expires in this respect pursuant to § 29 (1) no. 2 ErbStG with effect for the past.

§ 29 (1) no. 2 EStG is not applicable according to the case law of the Bundesfinanzhof (BFH) in the event that the person entitled to the compulsory share requires the gift to be handed over to the recipient in accordance with § 2329 (1) BGB, but the recipient averts the handover in accordance with § 2329 (2) BGB by paying the missing amount. The reason for this is the clear wording of § 29 (1) no. 2 ErbStG, which refers only to the case of § 528 (1) sentence 2 BGB. Therefore, the provision does not apply in other cases where publication is prevented by payment.

However, also in the case of § 2329 paragraph 2 BGB, the payment is to be taken into account in the taxation of the gift in accordance with § 10 paragraph 5 no. 2, paragraph 3 ErbStG. This amounts to a similar result.

2.2 Expiration of gift tax on spouses

2.2.1. Benefits between spouses

§ 29 paragraph 1 no. 3 ErbStG is relevant for grants between spouses. The standard is related to § 5 paragraph 2 ErbStG. Accordingly, the claim for compensation in the case of dissolution of the community of profits in the case of divorce of the marriage or termination of the property regime in the case of continuation of the marriage is tax-free. Grants during the statutory property regime to the spouse in anticipation of the continuation of the marriage, on the other hand, are subject to gift tax.

According to § 1380 (1) BGB, grants that go beyond the usual occasional gifts can, however, be counted towards the compensation claim. There is no time limit for the allocation of grants. The crediting has the consequence that the grant becomes an advance payment on a legal claim. So it is no longer generous. This case concerns § 29 (1) no. 3 ErbStG. The result of this standard is the expiry of the gift tax with effect for the past. Therefore, the grants subsequently become tax-free. This creates a similar situation as when returning a gift.

The expiry of the gift tax is necessary. Otherwise, the beneficiary of the compensation in respect of which earlier grants are credited would be at a disadvantage compared with those who, at the time of the dissolution of the joint venture, receive the benefit completely free of tax.

2.2.2. Grants pursuant to § 5 (1) ErbStG

Furthermore, § 29 (1) no. 3 sentence 2 ErbStG is also applicable to grants within the meaning of § 5 (1) ErbStG. These are grants which, when calculating the notional compensation for profits, were considered as advance payments and thus as deductions from the right to compensation. Thus, the gift tax also expires.

2.2.3. Applicable in all cases of termination of legal property regime

Finally, § 29 (1) no. 3 ErbStG is relevant in any case of termination of the statutory property regime of the community. This includes the death of the spouse as well as the dissolution in the case of agreement of another property regime in the case of continuation of the marriage.

2.2.4.

Due to the expiry of the gift tax, it may be advantageous to change the property regime during marriage. This is particularly recommended for unnamed donations, if a notification according to § 30 ErbStG was missed.

Then the tax is eliminated because of a retroactive event that is uncertain at the time of the gift, but would have been paid at a concrete expiry of things. Thus, until the retroactive event occurs, the use of the tax amount is to the State. The advantage unjustly obtained in this respect can be absorbed by the State by setting evasion interest.

The reduction of the tax has been retroactively omitted, so that the disclosure of the undeclared advance payment within the framework of the additional profit can be considered as a penalty-exempt self-disclosure. However, something different will apply if the advance payment is already the subject of a criminal tax investigation and the change of property regime is carried out in the light of these investigations.

However, when changing the property regime during marriage, care must be taken that the property regime is actually terminated. This does not occur in the case of a premature compensation for profits in the case of a marriage that continues to exist in this respect and in the case of a property regime (so-called flying compensation for profits).

But beware – if you are considering this design, you need to consider some things. In particular, unpleasant income tax consequences can occur. In addition, especially in the case of segregation of goods for an evening, weighty extra-tax reasons must be present, so that no tax avoidance charge is possible. Otherwise, as a general rule, the change in the property regime should only be considered if the advantage arising from the refund outweighs the disadvantage arising from the reduction in the inheritance rate.

2.3. Transfer of assets

§ 29 (1) no. 4 leads to the expiry of the gift tax and inheritance tax if the beneficiary has transferred the property. The recipient of the property must be the Federation, the Land or a domestic municipality or a domestic charitable foundation. The assets are to be transferred within 24 months.

The purpose of this standard is to encourage the acquirer to promote the beneficiary institutions by passing on the acquired assets. It is therefore intended to give the accrued property a purpose worthy of favour from the point of view of society. The exclusion of the tax is justified by the fact that the acquirer does not remain enriched.

If, on the other hand, the donor or deceased himself has transferred the assets to a beneficiary organisation, the expiration of the tax is not decisive. Rather, it is then decisive whether a tax exemption according to § 13 (1) no. 15, 16 ErbStG or a deduction according to § 10 (1), paragraph 5 ErbStG are eligible. The latter often leads to a more favourable result because of the discrepancies in the tax classes.

However, the expiration of the tax can serve as a rescue if the succession of assets has failed in the case of large assets.

3. treatment of drawn uses

Now, however, it may be that the beneficiary was also able to make use of it during the period at which he still held the property. This case is dealt with in § 29 paragraph 2 ErbStG. Accordingly, the acquirer is to be treated as a usufruit user for the period for which the uses of the gift object to be surrendered have been granted to him. The gift tax therefore expires. However, uses are still taxable.

The standard is a reduction requirement and leads to a reduction in the tax to be refunded. If treatment as a usufruct user would result in the tax to be collected for this purpose being higher than the tax to be collected for the gift object, no subsequent tax collection can therefore be based on Section 29(2) ErbStG.

Prerequisite is that the acquirer may retain the uses of the transferred assets. This is not the case if, for example, a contractually reserved right of recovery stipulates that the uses are to be surrendered. Section 29 (2) ErbStG does not intervene even if the donor or third party was entitled to a usufruct right, i.e. the recipient could not draw any uses.

If § 29 (1) no. 3 ErbStG is implemented because of the crediting of gifts between spouses, § 29 (2) ErbStG does not intervene by law. As a result of the crediting, the benefit loses its character as a voluntary benefit ex tunc and the beneficiary spouse also has the right to retain the benefit. Thus, the grants increase the final assets of the beneficiary spouse and reduce the tax-free compensation volume to the time of crediting.

§ 29 paragraph 2 ErbStG is a reduction provision with regard to the original acquisition. The acquirer is treated retroactively only as the acquirer of a usufruct right. Therefore, it is necessary to determine the value of the usufruct right at the time of the original acquisition. This value then forms the reduction amount.