category of persons (taxable persons) | allowance

Spouses | DM 600.000

Children and grandchildren | DM 400.000

other persons Tax class I | DM 100.000

Persons Tax Class II | DM 20,000

Persons Tax Class III | DM 10,000

Age | Pension allowance

up to 5 years | DM 100.000

up to 10 years | DM 80,000

up to 15 years | DM 60,000

up to 20 years | DM 40,000

up to 27 years | DM 20,000

Group of persons (taxable persons) / Property | Exemption

Spouses / registered partners | EUR 500,000

Children | EUR 400,000

Grandchildren | EUR 200,000

Household contents (Tax Class I) | EUR 41,000

Tax Class III | EUR 20,000

other movable property | EUR 12,000

The history of inheritance tax and gift tax in the Federal Republic was initially relatively constant. But at the latest since reunification, the number of legislative changes increased massively. In principle, there was only a large tax increase, which was opposed by a large number of measures that provided tax relief. There have been numerous approaches, particularly with regard to business assets, to minimise taxation. At the same time, the legislator linked the tax relief granted to conditions which were intended to ensure the continued existence of inherited or donated companies (for example, consideration of beneficiary assets, relief needs assessment).

1st History of Inheritance Tax and Gift Tax – Introduction

Taxation of wealth transfers is one of the oldest in the world. The Sumerians already knew an inheritance tax, later also the ancient Egyptians and Romans. In Europe, however, such a levy only arose in the modern period, first in Sweden, then in the Netherlands and soon after in some German countries. From there, it eventually spread across the continent and beyond. It thus became an integral part of modern tax law. Since then, the inheritance tax has been supplemented by the gift tax component, on tax equal treatment of anticipated inheritances. Therefore, in our present consideration of the history of inheritance tax, we will of course also include the gift tax.

2. introduction of inheritance tax and gift tax in the FRG

After the Second World War, the occupying powers, which had raised their inheritance and gift tax to 65% (UK) and even 75% (USA) to finance their war efforts in recent years, decreed that the Germans should also pay significantly more than the previous 15% in inheritance tax. In 1946, they raised the tax rate sharply to 60%. But already in 1949, the new government under Konrad Adenauer cut the tax to 38 percent.

In the still young Federal Republic, the taxation of capital transfers still took place under old Reich law. It was not until 1955 that the legislature in Germany (West) introduced a new legal basis for taxing capital transfers. It thus continued the tax generally established in the Empire in 1906.

Previously, transfers of property to spouses and children were temporarily exempt from taxation. But the new legal situation in 1955 also subjected such situations to the tax. However, they were subject to significantly cheaper tax brackets and allowances. Since then, tax classes and allowances depend on the degree of kinship between transferee and recipient. In addition, the tax rates in the three tax classes were already progressively staggered at that time. But what was also significant in 1955 was the reduction of the tax rate to 15%.

First tax increase in the history of the inheritance tax of the FRG

Similar to income tax, inheritance tax and gift tax remained essentially unchanged in Germany for many years. But in 1974 there was a realignment initiated by the SPD-led government. Thus, the tax rate for close relatives, i.e. spouses and children, was increased to 35%. This sounds like a huge increase at first glance, but this was only true for very wealthy groups of people. At the same time as the tax rate was increased, the allowance rose sharply from DM 10 million by a factor of ten to DM 100 million. The 1975 financial report shows that this tax increase resulted in additional revenues for the countries amounting to DM 112 million.

4th History of Inheritance Tax: Promoting Culture and Science

In 1990, the Federal Government advocated that heirs or gifted persons who transferred their received assets to a charitable foundation for the promotion of art, culture or science within one year should not have to pay inheritance tax. By the way, this also applies if you leave the property to the Federation or a federal state. In fact, the law still exists today (§ 29 (1) no. 4 ErbStG).

5th History of Inheritance Tax: Beneficiary Business Assets

Over time, it turned out that the inheritance tax and gift tax could become a significant burden in the transfer of business assets, which could endanger the survival of companies. It was therefore agreed in 1993 that there should be derogations for operating assets. At that time, a new paragraph 2a was introduced in § 13 ErbStG.

The core element was an increased allowance of DM 500,000 for inheritance tax, which should also apply to agricultural and forestry enterprises. In the case of a donation, the accepting person had to undertake that the allowance was also counted towards a later inheritance. If several buyers were also available, the allowance had to be divided at that time. And already at that time you could use the allowance only once every ten years. In addition, a five-year blocking period was created at that time, during which a transfer of the business assets benefiting from the tax would lead to retroactive taxation if certain conditions were not met. In this case, the exemption previously granted was also subject to taxation. In addition, the scheme also applied in the event of liquidation.

What the legislature also introduced into inheritance and gift tax law from 1994 onwards was the exclusion of the recognition of retroactively agreed cooperatives.

6th History of Inheritance Tax and Gift Tax: 1997 Reform

6.1. new version of § 13 ErbStG

But the changes introduced in 1994 were probably insufficient. Because with the annual tax law 1997 further extensive adjustments to the inheritance and gift tax were pending. Thus, § 13 ErbStG was subjected to a complete recast. This then provided for an allowance for household effects in the amount of DM 80,000 (tax class I) or DM 20,000 (tax classes II and III). For other movable objects you could set in the control class I DM 20,000. In addition, the acquisition by parents or grandparents had been newly regulated. They received an allowance of DM 80,000. However, this allowance only applied when their remaining assets were included. If this value was exceeded, a share may remain tax-free.

There was good news for inheritors and gifted people if they had provided care to a testator or donor free of charge. The same applies to the granting of maintenance. In these cases, DM 10,000 could be set as an allowance.

6.2. Favourability of operating assets

In the course of the new version of § 13 ErbStG, the new § 13a ErbStG was introduced. This means that the rules on beneficiary assets have been set out separately in a separate paragraph. There was a small addition to the previous regulations. Thus, a retroactive taxation should now take place even if more than DM 100,000 were withdrawn within the five-year blocking period.

6.3. Further changes to tax brackets and allowances

Extensive changes were introduced with the recast § 14 to 17 and 19 ErbStG. § 14 ErbStG now provided for new regulations on multiple acquirers of the same person within a period of ten years. § 15 ErbStG recast tax classes I to III, so that tax class II now took into account parents and grandparents in donations as well as siblings and their descendants as well as in-laws and children-in-law, stepparents and divorced spouses. And § 16 ErbStG now provided new allowances:

In addition, § 17 ErbStG introduced new regulations on pension allowances. In the case of inheritance, spouses received DM 500,000. For children, an age-related special allowance was provided:

And since the most extensive changes in the history of inheritance tax and gift tax have already been made, the tax rates should also receive a new dress. This was stated in the new version of § 19 ErbStG as follows:

Further amendments were introduced by introducing a new § 19a ErbStG, recasting §§ 27, 36, 37 and 37a ErbStG and repealing § 39 ErbStG, which applied to taxation in the new federal states until then (tax exemption). Of course, the legislature has accompanied this comprehensive reform by corresponding accompanying changes in the ErbStDV.

7th History of Inheritance Tax: Tax Relief Act 1999/2000/2002

Apparently there was still a need for legislative action. A few years later, the legislature recast parts of the ErbStG. This time it concerned §§ 3, 7, 9, 13a, 15, 19a and 20 ErbStG. Here, among other things, standards for the tax treatment of GmbH shares in companies and shareholders in the case of inheritances and the transfer of assets to foundations were redefined. There have also been new rules on the charge mechanism.

8. History of inheritance tax: BVerfG calls for further changes

The Federal Constitutional Court had passed a judgment on the unequal treatment of real estate assets and other types of assets and found that the unequal treatment constituted a violation. So the legislature had to improve the ErbStG in this respect. This time, however, the BewG was also affected, which always flanked the inheritance and gift tax law. So now the valuation of real estate with its market value took place. The transfer of owner-occupied residential property to their own children also introduced a size restriction of 200 m2.

In any case, on the occasion, the allowances were now given in euros:

In addition, the tax rates in tax classes I to III were reset:

In addition to the general tax increase of 1974, this represents another, albeit one-off, tax increase, which only affected tax classes II and III. The tax rates in tax class I, on the other hand, remained unchanged.

And since you were already there, changes have also been introduced in other areas of inheritance and gift tax law. Thus, the property status of the community of gain in inheritance was taken into account as well as legacies. In addition, the conditions for exemption from tax on business assets have been tightened.

9th History of the Inheritance Tax: Growth Acceleration Act 2009

Just one year later, the next correction to inheritance and gift tax law followed. In fact, the tax rates were reduced to tax class II. But also for the relief of operating assets, the legislature adjusted the law. Now, a tax exemption of 85% was sufficient if the wage sum of 400% was already secured after only five years. For a complete exemption, a payroll of 700 % had to be available within seven years.

10. History of inheritance tax: Bavaria’s special way 2017

Once again, a judgment of the BVerfG gave rise to targeted improvements to inheritance and gift tax law. This time it concerned the rules on taxation of business assets of §§ 13a and 13b ErbStG, which were in contradiction with Article 3 (1) GG. The legislator had received until the end of June 2016 time. But only in June 2017, it came by country decree to a new regulation. What was special about this country decree was that this time, unlike the otherwise "equal" ones, it was now a "coordinated". The reason for this was that the Free State of Bavaria intended further advantages. But already in November 2017 Bavaria partly back in.

Furthermore, at that time the asset relief requirements test was introduced beyond the previous threshold of EUR 26 million (§ 28a ErbStG). This approach can be used relatively easily to avoid inheritance or gift tax altogether, as can be seen from the example of the transfer of Axel Springer shares to Matthias Döpfner.

The story of inheritance tax and gift tax in the Federal Republic is essentially told to the end. Since 2017, further amendments to the legal texts have been incorporated into the ErbStG, but these are only clarifications or new formulations that did not bring about a significant change in the previous taxation.

11. History of Inheritance Tax and Gift Tax – Conclusion

The history of inheritance tax and gift tax in the FRG shows a strong parallel to that of income tax and wealth tax. Because in the early years of the Federal Republic, after the laws were introduced, there were no significant changes for many years. But the more we focus our consideration on the present, the more often one must also note extensive changes. On the one hand, the legislature has introduced various tax relief measures since reunification. On the other hand, standards that the BVerfG objected to under constitutional law also had to find a new, constitutional form. In any case, there are now usually minor changes to the existing legal text every year.

What is also striking is that in the history of the German inheritance tax and gift tax there was basically only one clear, general tax increase. It took place in 1974. One can therefore assume that so far all federal governments have considered the tax cut to be necessary and rejected an increase. In addition to the reasons already mentioned, which justified tax relief, the strengthening of Germany as a business location, the safeguarding of jobs and the compensation of tax increases in other taxes (for example, the income tax) are also relevant. With certainty, however, one can also assume a decent portion of ideology in the implementation of party-political agendas.