Deductible estate liabilities: An overview of the current principles

Estate liabilities play a decisive role in the calculation of inheritance tax, as they reduce the taxable acquisition, provided that they are deductible in accordance with Sec 10 para 3 to 9 German Inheritance Tax Act [ErbStG]. This topic repeatedly raises practical questions and is often the subject of decisions by the fiscal courts. In the following, we will give you an overview of the current principles and relevant aspects of this regulation.

First of all, it should be noted that deductible estate liabilities are divided into three main categories in accordance with Sec 10 para 5 ErbStG: decedent’s debts, inheritance debts and inheritance costs.

Debts of the deceased include all debts that were caused by the deceased and did not expire with his death. These include in particular tax debts, loan liabilities and other outstanding invoices. The repayment costs of these debts can also be deducted as costs for settling the estate. A special feature exists for business debts, which are already taken into account in the valuation of the business assets and are therefore not deductible as debts of the deceased. On May 10, 2023, the  German Federal Fiscal Court ruled that taxes incurred as a result of the retroactive declaration of the cessation of an agricultural or forestry business by the heirs in accordance with Sec 16 para 3b sentence 2 and Sec 14  para 1 sentence 2 of the German Income Tax Act [EStG] cannot be deducted as estate liabilities in accordance with Sec 10 para 5 no. 1 ErbStG. The plaintiffs, co-heirs of a testator who died in 2016, had retroactively declared the cessation of the business after his death, which led to a tax burden. The tax office refused to recognize this tax as a liability of the estate, and the heirs’ lawsuit was rejected by the German Federal Fiscal Court.

Inheritance debts, on the other hand, arise from the inheritance itself and affect the acquirer due to testamentary or legal obligations, such as legacies or compulsory portions. Here too, the restrictions of Sec 10 para. 6 ErbStG must be observed, according to which debts and liabilities are not deductible if they are related to tax-free assets.

The costs of inheritance include all costs that arise directly from the inheritance. These include in particular funeral costs, grave maintenance, distribution and settlement of the estate, as well as the costs of preparing the inheritance tax return. In its case law, the Federal Fiscal Court has interpreted the term “costs of settling the estate” broadly, so that it can also include costs for the legal and actual determination of the estate and the taking possession of the inherited property. However, the costs of administering the estate, which only arise after the estate has been established and serve to administer it, are not deductible.

A lump sum of 10,300.00 euros is granted for inheritance costs if no higher actual costs can be proven. However, this lump sum can only be claimed once per inheritance and not by each individual heir separately.

The special provision of Section 10 para 6 of the ErbStG, which limits the deduction of debts and liabilities if they are economically related to tax-free assets, should also be noted. This provision was amended by the Annual Tax Act 2020 to the effect that debts and liabilities that are not directly related to tax-free assets are now also taken into account on a pro rata basis.

Special principles apply to gifts, although there is no explicit legal provision on the deductibility of costs. However, the tax authorities allow the deduction of ancillary acquisition costs such as notary and land registry costs, while tax and legal advice costs incurred prior to the gift are not deductible.

In practice, it is important to check exactly which liabilities and costs are deductible and which are not, in order to calculate the inheritance tax correctly and to make any corrections to the tax return in good time. The expertise of a specialized tax advisor can be of great benefit in this regard, in order to take into account all relevant aspects and current developments.

We would be happy to provide you with comprehensive advice on the topic of “deductible inheritance liabilities” and on all other tax-related topics. You can reach us by phone at +41 40 528 403 0 or by email at info@rugefehsenfeld.de.