An inherited family home – is there scope for renovation if you plan to live there straight away?
The tax exemption under section 13(1)(4b) or (4c) of the Inheritance Tax Act (ErbStG) for a family home situated in Germany, the EU or the EEA (the EU plus Iceland, Liechtenstein and Norway) within the meaning of Section 181(1)(1) to (5) of the Valuation Act (BewG) is of particular significance in cases of inheritance, as it can significantly reduce the tax burden on the heir.
However, a disadvantage for the group of potential beneficiaries who stand to benefit in this respect (primarily the testator’s spouse, civil partner, children and stepchildren) is that the tax exemption is not, in principle, granted solely by the testator as use of the family home for one’s own residential purposes until the time of inheritance is required, provided that there are no objectively compelling reasons (such as the testator’s need for residential care) preventing uninterrupted owner-occupation. One of the conditions for tax relief is also a immediate subsequent use by the beneficiary for their own purposes, i.e. the heir’s move into the family home, which must take place without any culpable delay.
To date, both case law and the tax authorities have generally recognised that the heir is entitled, at least, to a A transitional period of up to six months. If, on the other hand, the heir does not begin to occupy the family home for their own use until after the expiry of six months, the heir must convincingly explain and demonstrate the reasons why it was not possible to move in earlier and why they are not responsible for these reasons. Circumstances within the heir’s control (such as renovation work) which, after the expiry of the six-month period, lead to a further delay in moving in will, by their very nature, only be deemed not attributable to the heir under specific circumstances.
Now, a Judgment of the Munich Finance Court (Judgment of 26 October 2022 – 4 K 2183/21) introduces, for the first time, an extremely interesting structural model designed to delay, on a case-by-case basis, the heir’s immediate occupation of the property beyond the six-month period.
Here are the details:
The decision of the Munich Fiscal Court was based on the circumstances that the testator had to give up her flat, which she had previously used for private purposes, following a move to a care home. To avoid the property standing empty, she let her flat on a fixed-term tenancy for a period of four years. When the testator subsequently passed away, the fixed-term tenancy agreement still had two years to run, meaning that the claimant heir (the testator’s daughter) was only able to move in once the fixed term had expired and following a subsequent five-month renovation.
Whilst the relevant tax office refused to grant the tax exemption under section 13(1)(4c) of the Inheritance Tax Act (ErbStG), citing the heir’s failure to take immediate personal use of the property, the Munich Fiscal Court ruled in favour of the claimant heir and granted the tax exemption. In the view of the Munich Fiscal Court, firstly, by entering into the fixed-term tenancy agreement, the deceased had neither temporarily relinquished her flat as a family home nor was there any failure on the part of the heiress to take immediate personal use of it.
From a certain point onwards, as a result of her increased care needs, the testator was no longer able to run her household independently, meaning that compelling reasons prevented her from using the flat. Furthermore, the testator also had a legitimate interest in letting the flat, as the rental income was intended to help cover the costs of her accommodation. The Fixed-term tenancy agreement According to the court, a four-year term had the advantage that a steady stream of rental income could be expected during that period, and that, once the term had expired, it would allow for the seamless and planned use of the property by a family member. At the time the tenancy agreement was concluded, the deceased, aged 96, had, according to the mortality tables of the Statistical Office,
The Federal Office also took into account an average life expectancy of 2.65 years, meaning that the chosen four-year time limit was not entirely disproportionate in this respect either.
Due to the fixed-term nature of the tenancy – and the associated Exclusion of the ordinary right to give notice – the heir was also able to demonstrate credibly that she had been prevented from taking immediate personal occupation of the flat for legal reasons beyond her control. As the heir and thus the legal successor to the deceased, the claimant had ultimately taken over the tenancy and was therefore obliged to fulfil the terms of the tenancy until the contract expired.
The ruling of the Munich Fiscal Court therefore makes it clear that a fixed-term tenancy agreement entered into during the testator’s lifetime – the term of which should be based on the testator’s statistical life expectancy – prevents the heirs, for objective reasons, from using the property for their own purposes immediately, and that moving in – within the usual six-month period – must only take place once the obstacle has ceased to exist. Thus, even if the heirs move in many years after the testator’s death, it may still be possible to grant the tax exemption.
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