German Inheritance & Gift Tax: Allowances, Rates & Strategies 2026

How the German Inheritance and Gift Tax System Works

Germany's inheritance and gift tax (Erbschaft- und Schenkungsteuer) taxes the transfer of wealth both at death (inheritance) and during lifetime (gifts). Both are governed by the same law (ErbStG) and use the same rates and allowances. The amount of tax depends on two factors: the relationship between the transferor and recipient (which determines the allowance and tax class) and the value of the transferred assets after deducting the allowance.

For expats, this system has significant implications. If you have built wealth in Germany or are planning to receive an inheritance from or give gifts to family members in another country, understanding the tax consequences is essential. Germany applies inheritance tax based on residency, meaning that if either the deceased or the heir lives in Germany, the worldwide estate may be subject to German tax.

The Three Inheritance Tax Classes

The inheritance tax system has its own three tax classes (not to be confused with income tax classes). These determine both the personal allowance and the applicable tax rates:

• Tax Class I: Spouses and registered life partners, children and stepchildren, grandchildren, parents and grandparents (in case of inheritance only)
• Tax Class II: Siblings, nieces and nephews, stepparents, children-in-law, parents-in-law, divorced spouses, parents and grandparents (in case of gifts)
• Tax Class III: All other recipients, including unmarried partners, friends, and unrelated persons

Personal Tax-Free Allowances

Each recipient has a personal allowance below which no inheritance or gift tax is due:

Tax Rates by Tax Class and Value

The taxable acquisition (asset value minus allowance) is taxed at rates that increase with the value and are significantly higher for more distant relationships:

The 10-Year Rule: Strategic Lifetime Gifting

The personal allowances for gifts renew completely every 10 years. All gifts from the same person to the same recipient within a 10-year window are aggregated, but once the window expires, the clock resets entirely. This creates powerful opportunities for tax-free wealth transfer over time.

For example, a parent wishing to transfer 1,200,000 euros to their child can do so completely tax-free by making three gifts of 400,000 euros each, spaced 10 years apart. Without planning, an inheritance of 1,200,000 euros would generate a taxable amount of 800,000 euros and result in approximately 152,000 euros in tax (at a 19% rate in Tax Class I).

Both parents can gift independently, so a married couple can transfer 800,000 euros per 10-year cycle per child, completely tax-free. Starting early (ideally in your 40s or 50s) allows two or three complete cycles and can shelter very substantial wealth from taxation.

Family Home Exemption

A special rule allows the family home (Familienheim) to pass entirely tax-free to the surviving spouse or children under certain conditions:

• Surviving spouse: The home is tax-free regardless of size, provided the spouse continues to live in it for at least 10 years after inheritance.
• Children: The home is tax-free up to 200 square meters of living space, also with a 10-year self-use requirement.

This exemption is particularly valuable in expensive metropolitan areas like Munich, Frankfurt, or Hamburg, where property values can easily exceed the personal allowance. If the heir moves out before the 10-year period is up (unless due to compelling reasons such as needing nursing care), the full tax becomes due retroactively.

Usufruct (Niessbrauch) to Reduce Gift Tax

One of the most effective tools for reducing gift tax on real estate is the usufruct reservation (Niessbrauchsvorbehalt). The donor transfers ownership of a property but retains the right to use it or collect rental income. The capitalized value of the usufruct right is deducted from the taxable gift value, often dramatically reducing the tax burden.

The calculation uses the annual yield of the property multiplied by an age-dependent factor based on the donor's life expectancy. For a 65-year-old donor, the factor is approximately 8.725. On a property worth 800,000 euros with annual net rent of 36,000 euros, the usufruct deduction would be approximately 314,100 euros, reducing the taxable gift from 400,000 euros (after allowance) to just 85,900 euros.

International Inheritances: Double Taxation

Cross-border inheritances create the risk of double taxation: the estate being taxed in both the country of the deceased and the country of the heir. Germany applies inheritance tax based on residency: if either the deceased or the heir has their residence in Germany, the entire worldwide estate is subject to German inheritance tax.

Germany has double taxation agreements for inheritance tax with only a few countries, including Denmark, France, Greece, Sweden, Switzerland, and the United States. For all other countries, Germany's unilateral credit provision (Section 21 ErbStG) allows foreign inheritance tax actually paid to be credited against the German tax, but only for assets located in that foreign country. The credit cannot exceed the German tax attributable to those foreign assets.

Expats should be particularly aware of this when maintaining assets in their home country. Receiving an inheritance from abroad while living in Germany triggers German tax liability on the entire inheritance. Early consultation with a tax advisor experienced in international estate planning is strongly recommended.

Key Takeaways for Expats

• German inheritance and gift tax uses the same rates and allowances, ranging from 7% to 50%.
• Close family members enjoy generous allowances: 500,000 euros for spouses, 400,000 euros for children.
• Unrelated persons (including unmarried partners) have only a 20,000-euro allowance and face rates of 30% to 50%.
• Gift allowances renew every 10 years, making strategic lifetime gifting highly effective.
• The family home can pass tax-free to spouses and children under a 10-year self-use requirement.
• Usufruct reservations on real estate can dramatically reduce gift tax on property transfers.
• International inheritances may trigger German tax if either party resides in Germany; double taxation agreements exist with only a few countries.