In its most recent ruling on the Right to a compulsory share The Federal Fiscal Court (BFH) has ruled that a Right to a compulsory share, which becomes part of the estate, is immediately transferred to the Inheritance tax is subject to this, even if the claim is not asserted or is only asserted at a later date.
Right to a compulsory share
Descendants, as well as parents and spouses, are afforded special protection under inheritance law. If they are excluded from the line of succession by a will, they may, under certain circumstances, be entitled to claim their statutory share. You can find out how to do this on our pages on Inheritance law.
From a tax perspective, the Mandatory portion as an acquisition from the deceased. However, for tax to be payable, the statutory share must actually be claimed. Only at that point can tax become payable. This also means that no tax is payable at all if the statutory share is not claimed.
The right to a compulsory share is inheritable
But what if the person entitled to a compulsory share dies before they have been able or willing to claim that share?
Under civil law, the matter is clear. The right to a compulsory share passes to the heir. This means that the heir can now assert the claim to the compulsory share against the party originally liable, in place of the deceased.
A claim to a compulsory share is subject to inheritance tax
But what about the Inheritance tax?
The Federal Fiscal Court (BFH) recently had to rule on a case in this regard. In the Judgment of 7 December 2016, Case No. II R 21/14, the case concerned the following facts:
The claimant was the sole heir of his father, who died in September 2008. As a result of his renunciation of the inheritance, the father was entitled to a compulsory share of €400,000, but had not asserted this claim against the party liable. This claim now passed to the claimant.
The tax office took the view that inheritance tax becomes payable upon the father’s death, irrespective of whether the claimant asserts his right to a compulsory share. The claimant, on the other hand, took the view that tax would only become payable for him once he himself asserted his right to a compulsory share.
Unfortunately, the Federal Fiscal Court (BFH) upheld the tax office’s view and gave the following reasons for this:
The testator’s estate passes in its entirety to the heir at the time of the testator’s death by way of universal succession. This process is referred to as acquisition by inheritance.
The acquisition also includes all the deceased’s claims, regardless of whether they have been asserted or not.
For a person who is originally entitled to a compulsory share and who acquires that entitlement through disinheritance, the law expressly provides that the tax becomes chargeable only at the time the claim is asserted. According to the Federal Fiscal Court (BFH), the reason for deferring the inheritance tax consequences of a claim to a compulsory share is to protect the beneficiary. The aim is to ensure that they do not become liable for inheritance tax even if they do not assert the claim at all. The Federal Fiscal Court (BFH) takes the view that „this respects the freedom of choice of the person entitled to a compulsory share whilst at the same time taking account of the fact that the compulsory share – unlike the inheritance – (Section 1942(1) of the German Civil Code (BGB)) or a bequest (Section 2180(1) of the German Civil Code (BGB)) has lapsed; in other words, the forfeiture of rights cannot be reversed with retroactive effect.“
However, the Federal Fiscal Court (BFH) does not recognise a similar need for protection on the part of the heir to a statutory share claim. In its view, the justification for deferring the taxation of a right to a compulsory share acquired originally lies in the family ties between the testator and the beneficiary of the compulsory share that are necessary for that right. However, this close personal relationship no longer exists to a sufficient degree for the heir to justify deferring the tax consequences.
Conclusion
Anyone who inherits a statutory share must pay tax on it immediately, even if he does not claim it, or only claims it at a later date. To avoid taxation, the only option initially is to renounce the inheritance in its entirety.
Recommendation for action
Sometimes it may be in the interests of all parties involved not to claim a compulsory share. This does not result in any tax consequences for the person originally entitled to the compulsory share. However, until the claim to a compulsory share becomes time-barred, there is a risk that the claim will become part of the estate and trigger tax liability. How can one protect oneself against this?
Once it is clear that a statutory share is not to be claimed, the person entitled to the statutory share may informally declare to the heir liable to pay that they are waiving their claim. We’d be happy to advise you on this.