Gift tax

The 10-year period: making multiple use of tax allowances

The key planning tool for gift tax is Section 14 of the Inheritance Tax Act (ErbStG). All gifts made to a recipient by the same person within a ten-year period are aggregated. The tax-free allowance is available only once during this period. Once the ten-year period has elapsed, a new period begins in which the full tax-free allowance can be utilised again. Parents can therefore gift their children 400,000 euros per parent, tax-free, every ten years. Over a period of two decades and with two parents, this amounts to 1.6 million euros per child, without any tax being payable.

For the purposes of calculating the time limit, the date on which the gift is made is decisive; in the case of land, this is the date of transfer of title and authorisation for registration, not the date of entry in the land register. Anyone wishing to use the time limit as a planning tool should document the relevant dates and avoid planning transfers at the last minute. This is because if the donor dies within ten years of making the gift, it is aggregated with the inheritance upon death, and the tax-free allowance is then only available on a pro rata basis in the event of inheritance. Transferring assets at an early stage therefore has a dual benefit, as it creates tax-free allowance periods whilst simultaneously reducing the burden on the subsequent estate. You can find out more about the compulsory portion aspects of this logic in our article on anticipated succession in relation to GmbH shares and property.

What is a chain gift and when does it work?

In a chain gift, an asset is transferred via an intermediary in order to make use of additional tax-free allowances. A classic example: a grandfather wishes to gift 400,000 euros to his grandson, but the grandson is only entitled to a tax-free allowance of 200,000 euros. If, instead, the grandfather gifts the money to his son (tax-free allowance: €400,000) and the son then gifts the amount on to his own child (again with a tax-free allowance of €400,000), the entire transfer remains tax-free. The same pattern applies to children-in-law: instead of making a gift directly to the child-in-law (tax-free allowance: 20,000 euros), the gift is made to one’s own child, who then passes on the asset, in whole or in part, to their spouse.

Although case law recognises this arrangement, it requires that the intermediary must actually be free to decide. The Federal Fiscal Court examines whether the initial recipient was free to dispose of the asset or was obliged to pass it on. An obligation to pass on the asset laid down in the gift agreement, or a transfer that is directly pre-arranged, results in the transaction being reclassified as a direct gift, thereby reducing the tax-free allowance. In practice, this means that two separate, temporally independent contracts must be concluded; no conditions regarding onward transfer may be agreed; and the intermediary must actually bear the financial risk. Anyone who, as a matter of routine, simply passes the asset on during the same notary appointment is effectively ‘giving away’ the arrangement in both senses of the word.

Which gifts are tax-free from the outset?

In addition to personal allowances, Section 13 of the Inheritance Tax Act (ErbStG) provides for a full tax exemption for certain gifts. For example, household effects may be transferred tax-free to beneficiaries in tax class I up to a value of 41,000 euros, whilst other movable tangible assets may be transferred tax-free up to a value of 12,000 euros. Usual occasional gifts, such as those given for a birthday, wedding or graduation, are not subject to tax from the outset; what is considered ‘usual’ is determined by the financial circumstances of those involved. Reasonable gifts for maintenance or education are also tax-free.

Two exemptions are of particular significance in terms of tax planning. Firstly, the family home: if one spouse transfers ownership of the property in which they live to the other during their lifetime, this acquisition remains fully tax-free under Section 13(1)(4a) of the Inheritance Tax Act (ErbStG), with no value limit and without being counted towards the tax-free allowance. Secondly, the so-called ‘matrimonial property regime switch’: if spouses terminate the community of accrued gains by means of a notarised change to the regime of separate property, the resulting claim for equalisation of accrued gains is not a taxable gift under Section 5(2) of the Inheritance Tax Act (ErbStG). In this way, substantial assets can be transferred on a tax-neutral basis to the spouse entitled to equalisation, who can subsequently pass them on to the children using their own tax allowances. Both instruments require careful implementation under civil law, as tax exemption depends entirely on the seriousness with which the arrangement is structured.

Usufruct and consideration: determining the tax base

The amount of gift tax is calculated on the basis of the enrichment of the recipient. Anything that the recipient accepts in return, or that the donor retains, therefore reduces the taxable gain. The most important tool is the reservation of usufruct: if, for example, the donor transfers a property or a securities portfolio and reserves the right to the income for life, the capital value of the usufruct is deducted from the taxable value. The capital value is calculated from the annual value of the use and a multiplier depending on the age and gender of the beneficiary, in accordance with Section 14 of the German Valuation Act (BewG). The younger the donor, the greater the deduction. In many cases, the reserved usufruct reduces the taxable acquisition below the tax-free allowance, meaning that the transfer is entirely tax-free.

The situation is similar with regard to assumed liabilities, agreed maintenance payments or equalisation payments to siblings: these transform a pure gift into a mixed gift, in which only the part provided free of charge is subject to tax. In the case of property and company shares, the valuation also determines the tax liability, as it is the value determined in accordance with the Valuation Act that is taxed, rather than the purchase price desired by the family. To find out how usufruct, rights of recovery and valuation issues interact when transferring GmbH shares and property, read our article on anticipated succession.

Gifting business assets: the exemption under Sections 13a and 13b of the Inheritance Tax Act

The law provides for specific exemption rules for eligible business assets, such as shareholdings in limited companies exceeding 25 per cent or co-owner shares. Under the standard exemption, 85 per cent of the eligible assets are exempt from tax, provided that the business is continued for five years and the wage bill requirement is met. In addition, a sliding-scale allowance of up to 150,000 euros is granted. Upon application, the optional exemption grants full tax exemption of 100 per cent, but requires a holding period of seven years, stricter wage bill requirements and a lower proportion of administrative assets.

The exemption is subject to conditions; any breach of these will result in proportionate back-taxation. Anyone who disposes of assets within the holding period, withdraws essential business assets or falls below the wage bill threshold will lose the benefit retroactively to the corresponding extent. For large-scale acquisitions exceeding 26 million euros, the tax relief discount is reduced; alternatively, a means test for tax relief may be considered, in which the acquirer must disclose their available assets. The transfer of business assets during the owner’s lifetime is therefore one of the areas of wealth succession that requires the most careful planning. You can find an overview of our advisory services on the ‘Wealth Succession and Foundation Law’ page. If assets are to be permanently tied up and protected from fragmentation, a family foundation may be the appropriate vehicle instead of a direct transfer.

Procedure: Notification, tax return and persons liable for tax

Any gift subject to gift tax must be reported informally to the relevant tax office within three months (Section 30 of the German Inheritance Tax Act (ErbStG)). Both the recipient and the donor are required to make this notification. In the case of gifts certified by a notary, the notary is responsible for making the notification, which is why transfers of property and shares are always brought to the attention of the tax office. Where necessary, the tax office will request the submission of a gift tax return. The recipient is liable for the tax; the donor is also jointly and severally liable. If the donor pays the tax, this payment is treated as an additional gift, which increases the tax base.

Failure to report a gift is no trivial offence: anyone who conceals a gift subject to reporting and thereby evades tax is liable to prosecution for tax evasion, which entails corresponding criminal and interest-related consequences. Particularly in the case of older, previously unreported transfers, it is advisable to sort out the matter properly before the tax office, in the event of inheritance, requests details of prior gifts made over the last ten years anyway.

Gifts with an international dimension: what families with an international presence need to bear in mind

German gift tax applies to assets acquired worldwide as soon as either the donor or the recipient is a resident of Germany. Residents are defined as persons with their domicile or habitual residence in Germany, as well as German nationals for a further five years after they have left the country (Section 2 of the Inheritance Tax Act (ErbStG)). The departure of a party involved therefore by no means immediately terminates German tax liability. Furthermore, double taxation agreements covering inheritance and gift tax exist with only a few countries. International families should therefore plan gifts with due regard to both legal systems.

In the case of business assets, income tax implications must also be taken into account: the transfer of GmbH shares free of charge shortly before or after a move abroad may trigger exit taxation under Section 6 of the Foreign Tax Act (AStG). How gifts and a change of residence can be coordinated is the subject of our article on the legal structuring of exit tax.

Legal status: July 2026 The allowances and tax rates under the Inheritance Tax Act (ErbStG) have remained unchanged since 2009. Discussions on reform, including the Bavarian application for a review of the exemptions, are pending before the Federal Constitutional Court, although no draft bill has yet been tabled.