Inheritance tax is levied on the transfer of assets from someone who has died to a person who survives them. To avoid hardship for the heirs, there are tax-free allowances and progressive tax rates.
Inheritance tax is calculated according to the value of the property, for example houses and land, and financial assets, such as savings accounts and securities, involved. The law favours close relatives: spouses may inherit up to 500,000 euros and children up to 400,000 euros free of tax. For distant relatives, however, only the first 20,000 euros are exempt. For everything beyond this, the fiscal authorities demand their share, which increases with the value of the assets.
Companies can be passed on to the next generation free of tax if the firm is worth less than 26 million euros, the business is continued for at least seven years and the workforce is retained. If these conditions are not met, the tax department can claim up to half of the assets the heirs have inherited.
Annual revenues from inheritance tax, which flow to Germany’s sixteen states, exceed 7 billion euros. A reform has been proposed which would simplify the tax by introducing the so-called "flat-tax model", a system with a broad base and a comparatively low burden. It is estimated that a tax rate of some 8 percent would prove revenue neutral for the state.