According to a recent ruling by the Hessian Finance Court (Ref. 1 K 1507/16) dated 15 December 2016, the following are also subject to Children of parents, which, whilst not legally binding, biologically related are the cheapest Inheritance and gift tax allowance of €400,000.
Inheritance tax allowance, gift tax for biological parents: Children are considered to be biologically related, for example, if their father is the biological father but the child is born during the mother’s marriage to another man. In this case, the mother’s husband is the children’s legal father.
In the case in question, a father gave his biological daughter a sum of money. The tax office sought to tax the gift at tax class III, as it considered that the daughter was not a child for the purposes of gift tax.
Whether a gift or inheritance is subject to gift tax or inheritance tax depends largely on the family relationship between the donor or testator and the recipient or heir.
Tax law classifies taxpayers into tax brackets, Section 16 of the Inheritance Tax Act. The most favourable tax bracket, Bracket I, applies to:
- Spouses and civil partners,
- Children and stepchildren,
- Grandchildren and great-grandchildren, as well as
- in the case of inheritances from the testator’s parents and grandparents.
The second-lowest tax bracket, Tax Class II, includes:
- Parents and grandparents in the case of gifts,
- Siblings,
- First-degree descendants of siblings,
- Stepparents,
- Children-in-law,
- Parents-in-law,
- the divorced spouse and the partner in a dissolved civil partnership.
All those not mentioned fall into the less favourable tax bracket III.
Depending on the tax bracket, the following inheritance tax and gift tax allowances apply.
| Tax bracket / Family relationship | Tax-free allowance |
| Tax bracket I: Spouse / civil partner | 500.000 € |
| Tax class I: Children and grandchildren, where the parents have already passed away | 400.000 € |
| Tax bracket I: Grandchildren of parents who are still alive | 200.000 € |
| Tax bracket I: all other individuals | 100.000 € |
| Tax bracket II | 20.000 € |
| Tax bracket III: | 20.000 € |
In the case in question, the court ruled that restricting the definition of ‘child’ to legal children within the meaning of Section 1592 of the German Civil Code (BGB) was not permissible. Consequently, biological children are also entitled to the maximum tax allowance of €400,000. The tax office had sought to place the biological child in tax bracket III.
The ruling is welcome, but the final decision has not yet been made. The tax office has lodged an appeal, so the Federal Fiscal Court will now have to rule as the court of last instance.