Tax-Free Gifts – How to Transfer Your Wealth in a Tax-Optimised Way
This guide refers to German law and the German tax system. It is a translation of our German original and does not replace individual tax or legal advice.
A gift can be an effective way of transferring wealth to the next generation tax-free or at least in a tax-optimised way. However, without precise knowledge of the tax provisions and careful planning, a gift can entail a heavy tax burden. In Germany, strict rules apply to gift tax (Schenkungsteuer), but these can be mitigated or avoided through various strategies. Lifetime gifts offer considerable tax advantages, as targeted planning allows heirs to save tax if assets are transferred during the donor's lifetime.
For wealthy employees and entrepreneurs, a tax-free gift can be particularly attractive, as high tax rates on wealth can impair the future financial stability of the estate. Together with experienced tax advisers and notaries, Neo Capital GmbH supports you in transferring wealth in a targeted and tax-optimised way. The focus here is on reducing or avoiding gift tax in order to secure assets within the family or the corporate structure over the long term.
Gift tax and allowances – the basics
In Germany, every gift is in principle subject to tax as soon as it exceeds the recipient's personal allowance. The amount of the allowances varies depending on the degree of kinship. In the case of an inheritance, allowances and tax classes are also relevant, as they influence the amount of tax.
The applicable allowances are set out in the German Inheritance and Gift Tax Act (ErbStG, Erbschaftsteuer- und Schenkungsteuergesetz):
- Spouses and registered civil partners: €500,000
- Children: €400,000
- Grandchildren (if the parents have died): €200,000
- Other persons (not related): €20,000
These allowances can be used again every ten years. This means that transfers of wealth can be staggered over a longer period in order to avoid high tax burdens. A frequently used strategy is therefore staggered gifting, in which wealth is transferred over decades in tax-privileged instalments. Neo Capital advises clients on how to make optimal use of these allowances.
Gift tax becomes due when the value of the gift exceeds the recipient's personal allowance. Tax liability on gifts and inheritances depends on various factors, including the degree of kinship and the amount of wealth transferred.
The tax rates vary according to the tax class and the value of the gift. The different tax classes determine the amount of tax payable and depend on the relationship between the donor and the recipient.
What is a gift?
A gift is the gratuitous transfer of assets from one person to another. This can involve various assets, such as money, property, securities or other valuable goods. Gifts can be made within the family as well as between friends or other persons. A gift reduces the donor's wealth, while the recipient's wealth increases accordingly. It is important to consider the tax implications of a gift in order to avoid possible tax burdens.
When is gift tax payable?
Gift tax becomes due when the value of the gift exceeds the recipient's personal allowance. The amount of the allowance depends on the degree of kinship between the donor and the recipient. Spouses and registered civil partners have an allowance of €500,000, while children and grandchildren enjoy an allowance of €400,000 and €200,000 respectively. For all other recipients, the allowance is €20,000. It is therefore crucial to know and use the allowances in order to minimise or avoid gift tax.
How is gift tax calculated?
Gift tax is calculated by reducing the value of the gift by the recipient's personal allowance. The remaining amount is then taxed at the corresponding rate. The tax rates vary according to the tax class and the value of the gift. For example, the tax rates for close relatives in tax class I are lower than for more distant relatives or unrelated persons. Precise knowledge of the tax rates and allowances is therefore essential in order to optimise the tax burden.
Personal allowances for gifts
The personal allowances for gifts are governed by Section 16 ErbStG and depend on the recipient's degree of kinship to the donor. These allowances make it possible to transfer wealth tax-free up to a certain amount. By using these allowances skilfully, high tax burdens can be avoided. It is advisable to use the allowances again every ten years in order to transfer larger assets gradually and in a tax-optimised way.
Spouses and civil partners
Spouses and registered civil partners have a personal allowance of €500,000. This allowance can be used for gifts between spouses or civil partners. It is important to note, however, that the gift must be made within ten years of the last gift in order to be able to use the allowance again. Through strategic planning and use of this allowance, spouses and civil partners can achieve considerable tax savings and transfer their wealth in a tax-optimised way.
Tax-free gifts through family businesses and property
Family businesses and property offer special opportunities for transferring wealth in a tax-optimised way. Business assets can, under certain conditions, be transferred almost tax-free if they qualify as business assets (Betriebsvermögen). The tax relief for business assets is linked to various conditions: tax exemptions can play a significant role here by allowing business assets to be transferred without gift tax under certain conditions.
- Obligation to continue the business: the recipient must continue running the business for at least five years in order to benefit from a tax exemption of up to 85%. With a ten-year holding period, this rate increases to 100%.
- Payroll rule (Lohnsummenregelung): during this time, the total payroll must amount to at least 400% of the average annual payroll of the last five years before the gift.
By planning and implementing these criteria early, considerable tax burdens can be avoided. Neo Capital supports clients in structuring gifts within the family or in business succession planning in order to transfer business assets to the next generation while saving tax at the same time.
There are also special opportunities with property. Owner-occupied properties can, under certain conditions, be transferred tax-free if they continue to be used by the recipient.
One example is the so-called family home (Familienwohnheim): if the property is given to the spouse or a child and the recipient lives in the house or flat themselves, the transfer can be tax-free. For children, however, the living space is limited to 200 square metres. This rule makes it possible to keep valuable properties in family ownership and to reduce the tax burden considerably.
Gift with usufruct – a tax-optimised solution
Another strategy for transferring wealth in a tax-optimised way is a gift with reservation of usufruct (Nießbrauchvorbehalt). The usufruct (Nießbrauch) entitles the donor to continue receiving income from the assets, such as rental income, despite the transfer of ownership. A notarised deed of gift is of great importance here, as it sets out the legal framework for transferring the assets subject to the reservation of usufruct. At the same time, the assets are transferred out of the donor's taxable holdings, so that future increases in value accrue to the recipient without additional gift tax.
The usufruct reduces the gift value of the property, as the tax office (Finanzamt) calculates the gift after deducting the value of the usufruct. This depends on the age of the donor and the current rental income. The calculation is made using the so-called present value method, which takes into account the total duration of the income from the property via the capitalised value of the usufruct. Particularly for properties with a high market value, the value to be applied for tax purposes can be reduced considerably, so that the recipient has to pay no or only a small amount of gift tax.
Together with tax advisers, Neo Capital GmbH develops tailor-made concepts for transferring wealth sensibly and in a tax-optimised way through reservations of usufruct. This allows clients to continue to benefit from the income while ownership is transferred on tax-privileged terms.
Structuring options through the insurance wrapper
In addition to the classic gift, the so-called insurance wrapper (Policenmantel) can also be used as an instrument for tax optimisation. The insurance wrapper, a form of insurance, enables the tax-free transfer of wealth within the framework of a life insurance policy. Here, assets are paid into the insurance policy and the recipient is named as beneficiary.
The advantage of the insurance wrapper is that income generated within the policy remains tax-free and only half of it has to be taxed when the policy pays out to the recipient during their lifetime. In addition, gifts with revocable or irrevocable beneficiary rights can also be structured via the insurance wrapper. This gives investors a high degree of flexibility, as they retain control over the assets and can transfer them in a tax-optimised way.
Neo Capital GmbH works closely with specialist insurance advisers and notaries in this area in order to find suitable policy solutions for its clients and thus enable tax-free transfers of wealth.
Tax exemption through long-term gift planning
Most strategies for tax optimisation of gifts are based on long-term planning. By structuring early and using the ten-year period between individual gifts, large fortunes can be transferred tax-free step by step. This long-term gift planning is particularly attractive for wealthy private individuals and entrepreneurs who intend to secure their wealth over several generations. By contrast, acquisition upon death offers high allowances for close relatives and lays down important tax rules that must be taken into account when calculating inheritance tax (Erbschaftsteuer).
Neo Capital GmbH offers comprehensive advice for clients who wish to structure their gifting strategy professionally. By working with experienced tax advisers and notaries, the company develops tailor-made solutions to reduce the tax burden and secure family wealth. From staggered gifting to special arrangements such as reservations of usufruct or insurance wrappers, every concept is tailored to the client's individual financial and family situation.
Conclusion: tax-free gifts – reaching your goal with the right strategy
A tax-free gift is a complex but worthwhile task for property and capital investors. Through targeted planning and the use of legal structuring options such as staggered gifting, usufruct or the insurance wrapper, gift tax can be reduced considerably or avoided altogether. Unlike an inheritance, gifts offer greater scope for structuring in order to save tax; inheritances and gifts are treated similarly for tax purposes, but the allowances and tax classes vary. Particularly with large fortunes, professional support is crucial in order to make full use of the legal and tax potential.
Neo Capital GmbH is the ideal partner for clients seeking a tax-optimised transfer of wealth. Together with experienced tax advisers and notaries, the company develops tailor-made gifting concepts that secure wealth over the long term and reduce the tax burden.