International inheritance tax law and gift tax is particularly complicated. Here, a distinction is made between EU/EEA property conduct and non-EU property conduct. Using the example of Great Britain, we explain the international inheritance tax and gift tax in inheritance cases and gifts within the European Union (= before Brexit) and capital transfers to third countries (= after Brexit).

For example, tax exemptions for residential properties, family residences and business assets can no longer be used. The tax exemption pursuant to § 13c ErbstG for rental of land for residential purposes in the amount of 10 percent of your value will no longer apply as the property must be located within the European Union. This also applies to tax exemptions for family residences. A drastic reduction of the allowance according to §16 ErbStG is to be expected in the case of inheritances or gifts of a person living in Great Britain to his spouse. The reason is that the option of unlimited tax liability according to § 2 Abs. 3 ErbStG can no longer be exercised. The option requires a location within the EU as the taxpayer’s residence. Real estate in such cases should be transferred before exit. However, beneficiary capital transfers are also at risk. The benefits under §§ 13a, 13b ErbStG are only applicable to operating assets within the EU or the EEA.

Acquisition of death as well as donation among living persons is subject to § 1 para. 1 No. 1 and No. 2 inheritance tax and gift tax law (ErbStG) of the inheritance tax and gift tax respectively. An unlimited tax liability occurs according to § 2 Abs. 1 No. 1 ErbStG, if the decedent, the donor or the acquirer at the time of the creation of the tax acc. § 9 ErbStG is a national. [1] § 2 ErbStG thus regulates personal tax liability. [] 2]

According to § 2 para. 1 no. 1 a) ErbStG any natural person who has a domicile or habitual residence in Germany. For the determination of the habitual residence § 9 Tax Code applies accordingly. German nationals who have resided abroad for no more than five years without having a residence in Germany count according to § 2 para. 1 no. 1 b) ErbStG also as a national. Further definitions of the national result from § 2 para. 1 no. 1 c) and d. According to § 2 Abs. 2 ErbStG also includes the share of the continental shelf owed to the Federal Republic of Germany as far as the natural resources of the seabed and subsoil are explored and exploited there. The definition of § 2 Abs. 2 ErbStG for Germany, however, plays a role at most for operating sites. [3]

In addition to the allowances of § 16 ErbStG, there are also other tax exemptions for the acquirer, which are mentioned in §§ 5, 13, 13a, 13c, 13d, 17 and 18 ErbStG. After taking into account the tax exemptions, the taxable acquisition results within the meaning of § 10 Abs. 1 ErbStG. Depending on the personal relationship between the acquirer and the decedent or donor, one of the three tax classes within the meaning of § 13 para. 1 ErbStG. Depending on the tax class, the determined taxable acquisition is then subject to the tax rates of § 19 Abs. 1 ErbStG.

3. Disadvantages of third country inheritances

Brexit will result in significant changes to the tax exemptions, which will be explained in part in the following, in particular with regard to the tax exemption of family homes within the meaning of § 13 para. 1 No. 4a and No. 4b ErbStG as well as the tax exemptions for business assets according to § 13a ErbStG.

3.1 Family home tax exemptions

For an unlimited taxable acquirer within the meaning of § 1 para. 1 No. 1 or No. 2 ErbStG in conjunction with § 2 Abs. 1 No. 1 ErbStG applies to the acquisition of real estate that is rented for residential purposes, in principle, both in the case of acquisition by donation and in the case of acquisition on account of death, that only a value of 90 percent according to § 13d para. 1 ErbStG is to be brought into approach.

3.1.1 Requirements for tax exemption according to § 13d ErbStG

The prerequisites for the reduced valuation result from § 13d para. 3 No. 1 to 3 ErbStG. According to § 13d para 3 no. 2 ErbStG, the built-up property has to be located in Germany, a member state of the European Union or in a state of the European Economic Area.

3.1.2 Exit of the UK from the EU: Abolition of the tax exemption according to § 13d ErbStG

After the withdrawal of Great Britain from the European Union and without entering the European Economic Area, the tax exemption under § 13d ErbStG would cease.The acquisition of a property rented for residential purposes, which is located in Great Britain, will in future be subject to the full inheritance and gift tax. [1]

Significant tax disadvantages arise in particular when acquiring a built-up property that is used for own residential purposes. According to § 13 para 1 no. 4b ErbStG is the acquisition of death for the surviving spouse or cohabiting partner tax free if the deceased has used the apartment for his own residential purposes and the acquirer immediately takes over the apartment for his own residential purposes. The same applies according to the inheritance tax directive R E 13.3 para. 1 also for donation among living one spouse to the other spouse or among life partners.

The acquisition of death by children is also in accordance with § 13 para. 1 No, 4c) ErbStG tax-free. In addition to the conditions of § 13 para 1 no. 4b ErbStG comes the regulation that the living space may not be more than 200 square meters.

The tax exemption applies in both cases, however, only for the acquisition of property or joint ownership in the country, in a member state of the European Union or a state of the European Economic Area acc. § 13 Abs. 1 no. 4b sentence 1 ErbStG in the case of acquisition by a spouse or partner or in the case of acquisition of death by children of the deceased acc. § 13 para 1 no. 4c sentence 1 ErbStG.

With the final exit of the UK from the European Union, the tax exemption for family homes is completely eliminated. [2] Specifically, this means, for example, in the case of the acquisition of a property located in the United Kingdom due to death by a person pursuant to § 2 Abs. 1 in Germany unlimited taxable child, even if the property is used for own residential purposes, a full tax liability in Germany.

3.1.3 Tax burden comparison after Brexit (EU vs. third country)

Suppose the property is an apartment in London with less than 200 square meters and one according to §§ 157 ff. BewG determined value of 2,000,000 euros, would instead of the previous tax exemption a taxable acquisition within the meaning of § 10 para. 1 ErbStG of 1,600.00 Euro. The allowance of 400,000 euros according to § 16 Abs. 1 no. 2 ErbStG. So, if there are no other heirs and no other assets, the child has the taxable acquisition in the amount of 1,600,000 euros with the tax rate of 19 percent acc. § 19 para 1 ErbStG. This results in a tax burden of 304,000 euros for the purchaser compared to the previous complete tax exemption.

3.1.4 Possible tax arrangements

A tax arrangement in the form of a gift before the UK leaves the European Union is possible in the case of a gift to the spouse or life partner. This requires the requirements set out in § 13 para 1 no. 4b ErbStG. The tax-free transfer to a child is not possible, since the tax exemption according to § 13 para 1 no. 4c ErbStG applies to children only for the acquisition of death.

3.2 Tax exemptions for business assets according to § 13a ErbstG

The acquisition of death on account of or by donation of business assets or shares in corporations is in principle subject to unlimited taxable acquirers within the meaning of § 2 para. 1 ErbStG of the inheritance or gift tax.

3.2.1 Tax exemption by standard exemption according to § 13a ErbStG in the amount of 85 percent

The legislature, however, provides for the acquisition of beneficiary assets a relief discount of 85 percent according to § 13a para. 1 sentence 1 half sentence 1 ErbStG. In order to be able to claim the tax exemption, the acquired beneficiary property may not exceed 26 million euros according to § 13a para. 1 sentence 1 half sentence 2 ErbStG. If the beneficiary property does not exceed this limit, the absorption discount shall be granted if the acquirer fulfils the other requirements of § 13a ErbStG.

3.2.2 What counts as the beneficiary property?

The legal definition of the eligible assets results from § 13b para. 2 sentence 1 ErbStG, whereby the distinction between unfavourable assets and the beneficiary assets plays a central role in corporate inheritance tax law. [1] The regulation of eligible assets is very complex. [2] The eligible assets include, inter alia, according to § 13b para. 1 No. 2 ErbStG domestic business assets and corresponding business assets serving a permanent establishment in a Member State of the European Union or in a country of the European Economic Area.

Shares in a corporation are also possible as eligible assets if according to § 13b para. 1 No. 3 ErbStG the decedent was directly involved at least 25 percent and the corporation has its registered office in Germany, a member state of the European Union or a state of the European Economic Area. In the case of the transfer, only the actual amount of the participation of the deceased with at least 25 percent is decisive. [3] The decedent may also transfer fewer shares to the acquirer. [4] It should also be noted that an indirect holding cannot form part of the eligible assets. [5] This also applies to indirect participation through an asset management company. [] 6]

According to § 13b para. 1 sentence 1 ErbStG favours the eligible assets to the extent that the common value exceeds the net value of the management assets within the meaning of paragraph 6 reduced by the harmless administrative assets within the meaning of paragraph 7. Thus, the administrative assets, with the exception of the proportional debts and the harmless administrative assets within the meaning of paragraphs 6 and 7 of § 13b ErbStG, are subject to full taxation.[7] The concept of administrative assets is described in § 13b para. 4 No. 1 to 5 ErbStG, according to which funds within the meaning of § 13b para 4 no. 5 ErbStG also belong. As a result, it is no longer possible to transfer money tax-free via a company. [] 8]

3.2.3 Tax exemption through option exemption according to § 13a ErbstG in the amount of 100 percent

The purchaser has the possibility, in addition to the rule protection of § 13a para. 1 sentence 1 ErbStG of 85 percent[9] also the option exemption of 100 percent according to § 13a para. 10 sentence 1 ErbStG irrevocably. [10] However, with the application for the exemption discount of 100 percent, stricter conditions also result than with the option exemption. [11] Thus, the retention period of five years changes in accordance with § 13a Abs. 6 ErbStG for a retention period of seven years (§ 13a para 10 no. 6 ErbStG), likewise the payroll period is extended to seven years according to § 13a para. 10 No. 2 ErbStG and the minimum wage amount increases depending on the number of employees to 500 to 700 percent according to § 13a para. 10 No. 3 to 5 ErbStG.

3.2.4 Exit of the UK from the EU: Abolition of the tax exemption according to § 13a ErbstG

Due to the limitation of § 13b para 1 ErbStG, the eligible assets are only available if they are located in Germany, in a member state of the European Union or in a state of the European Economic Area, an exemption discount of 85 percent according to § 13a para. 1 sentence 1 ErbStG or even 100 percent according to § 13a para. 10 No. 1 ErbStG no longer possible when Great Britain leaves the European Union. As a third country, tax relief will no longer be possible for the inheritance or gifting of permanent establishments or shares in corporations domiciled in Great Britain. This may result in drastic additional tax burdens for the acquirer. The effects are illustrated in the following example:

3.2.5 Tax Comparison after Brexit

Father A holds 100 percent shares in A GmbH, while A GmbH has a branch in the United Kingdom. The company has a total tax value of 25 million euros, of which 15 million euros are attributable to the branch in the United Kingdom. The administrative assets are not more than 10 percent, so there is a fully beneficiary assets according to m. § 13b. A wants to transfer his shares to his son B. B would like to benefit from the rule exemption in the amount of 85 percent of § 13a Abs. 1 sentence 1 ErbStG.

Until now, a tax exemption for the acquirer B of 85 percent for the total company value of 25 million euros would have been possible. After taking into account the exemption discount of 85 percent in accordance with § 13a para. 1 sentence 1 ErbStG and the allowance after $ 16 Abs. 1 No. 2 ErbStG in the amount of 400,000 euros remained a taxable acquisition of 3.350,000 euros. The tax for this acquisition would be in accordance with § 15 Abs. 1 No. 2 ErbStG in conjunction with § 19 Abs. 1 ErbStG 19 percent. It would thus result in a gift tax of 636,500 euros for B.

After the complete withdrawal of Great Britain from the European Union, the tax exemption of § 13a Abs. 1 sentence 1 ErbStG of 85 percent only possible for the assets located in Germany. This amounts to 10 million euros, where a tax exemption of 85 percent is possible. The taxable acquisition now consists of the assets located in Germany after tax exemption of 85 percent within the meaning of § 13a para. 1 sentence 1 ErbStG in the amount of 1.5 million euros and the property of 15 million euros in Great Britain minus the allowance of 400,000 euros acc. § 16 Abs. 1 No. 2 ErbStG together and amounts to 16.1 million euros. By increasing the taxable acquisition, the tax rate according to § 19 para. 1 ErbStG in conjunction with § 15 Abs. 1 No. 2 ErbStG to 27 percent. After Brexit, the gift tax of the B amounts to 4.347,000 euros and means an additional tax burden of 3,710,500 euros for B. The same would apply in the case of inheritance.

From a tax point of view, it is advisable to make planned donations of operating assets or shares in corporations domiciled in the United Kingdom before the final withdrawal of the United Kingdom from the European Union.

3.2.6 Benefits of Brexit for the payroll period (third countries)

The withdrawal of Great Britain may also result in advantages in the inheritance and gift tax. For the granting of the exemption fee of 85 percent according to § 13a para 1 sentence 1 ErbStG in conjunction with § 13b para. 2 ErbStG is, among other things, compliance with the payroll period of 400 percent according to § 13a Abs. 3 sentence 1 ErbStG or 700 percent according to § 13a para. 10 No. 3 ErbStG when applying for the exemption fee of 100 percent according to § 13a para. 10 No. 1 ErbStG.

For the calculation of the payroll period, the payroll and the number of employees of investments in partnerships or corporations in a Member State of the European Union or in a country of the European Economic Area acc. § 13a para 3 sentence 11 ErbStG. Similarly, sentence 11 applies to shares in corporations if the participation is more than 25 percent, § 13a para. 3 sentence 12 ErbStG. Due to the withdrawal of Great Britain from the European Union and the associated assignment as a third country, these same permanent establishments or shares in corporations are no longer taken into account in the calculation of the payroll period[12] acc. R E 13a.4 para 6 p. 1 and para 7 p. 1 inheritance tax guidelines.

3.2.7 Control design

If a redundancy is planned after donation at establishments located in Great Britain, it is advisable for tax purposes to wait until the final withdrawal with the gift in order to obtain the tax exemption pursuant to § 13a para. 1 ErbStG i. V. m. § 13b para. 2 ErbStG not to be endangered by falling below the payroll period. According to R E 13a.4 para 5 ErbStR, the last five years before the tax was incurred are decisive for the determination of the initial wage sum; a gift should therefore only be made later.

4th Conclusion

The withdrawal of the United Kingdom from the European Union has far-reaching consequences. The same applies to inheritance and gift tax. Due to the complexity and the short implementation period, we strongly recommend that you seek advice from a tax consultant and become active.