Inheritance tax despite an empty inheritance: Federal Finance Court rules

The testator does not even have to leave behind any debts. Even an unclear inheritance situation can result in an inheritance amounting to zero euros after all formalities and procedures have been completed. The Federal Finance Court recently had to clarify whether the tax office can still claim inheritance tax in these cases (case II R 1/22).

The testator, who died in 2006, actually planned it differently. In order to avoid legal succession, he had left a handwritten will naming a man, his mother and another woman as heirs, with the assets to be divided equally between all three.

After the testator's death, the testator's legal heirs applied for a certificate of inheritance at the responsible local court. Since the court did not know the will and its contents, only the legal heirs were named in the certificate of inheritance, each with a half share.

Eight years later, the certificate of inheritance was confiscated again - apparently the will had appeared, which the man in it had not initially known about. The man turned to the district court to get his share of the inheritance. Two more years later, a new certificate of inheritance followed, with which the man, his mother and the other woman each inherited a third of the assets in accordance with the will.

In 2017, the man also learned that the testator was still entitled to a compulsory portion of 250,000 euros from his father's inheritance. This amount flowed into the testator's estate and had already been paid out to the two legal heirs in 2013 based on the inheritance certificate that was valid at the time.

Based on the share of the inheritance to which the man was legally entitled, the responsible tax office issued an inheritance tax notice in 2018. The man objected to this because he had received nothing from the estate.

At the same time, he requested that the inheritance tax be set at zero euros for reasons of equity. This possibility exists according to Section 163 Paragraph 1 Sentence 1 of the Tax Code (AO) if the levying of the tax in the individual case would be unfair, i.e. not justified.

After the tax authorities rejected the man's objection, the man sued the Düsseldorf Finance Court. During the ongoing legal proceedings, the tax office also rejected the determination of the inheritance tax at zero euros as unfounded.

The man then made this part of the proceedings. He justified this with his unsuccessful efforts to receive the share of his inheritance to which he was entitled and to obtain information from the other heiresses.

Specifically, the man had tried in vain for more than nine years to have the initially issued certificate of inheritance declared invalid. It later emerged that the two legal heirs had completely used up the estate by 2016. One of them also received basic security from 2012. Both women now lived abroad.

The tax court nevertheless did not recognize the main application to revoke the inheritance tax assessment. However, it obliged the responsible tax office to set the tax at zero euros for reasons of equity.

However, the authority saw this decision as an incorrect application of Section 163 AO and therefore appealed to the Federal Finance Court. The judges there ultimately followed this assessment and referred the case back to the tax court for a new hearing and decision.

The Federal Finance Court emphasized that the tax office can generally assume that an inheritance has been received in accordance with the inheritance certificate and - if the tax allowances have been exceeded - assess inheritance tax.

A different tax assessment for reasons of equity is in principle possible. However, the judges missed two crucial points in the lower court's decision. Accordingly, the tax court had not checked whether the man was entitled to compensation claims against the two heiresses. Furthermore, there was no concrete determination as to whether the enforcement of such claims would have been reasonable.

Inheritance tax can therefore be set lower in exceptional cases if an heir comes away empty-handed through no fault of their own. It is crucial that he does everything possible to secure the estate or assert claims for compensation. The burden of proof for this lies with the cheated heir. Alternatively, he must show that his efforts were futile because the inheritance was squandered.