Inherited assets under the regime of the community of accrued gains - Part 1: A practical case study on the ramifications in the event of the death of a spouse
In legal advisory practice, the equalisation of accrued gains throws up a lot of issues in the case of more complicated asset developments. This applies all the more if the inheritance exists in the form of properties or securities and, over the course of the marriage, these not only appreciate in value but are also developed further using joint assets. Here, in this first part of our report, the civil law and inheritance tax consequences in the event of death are presented on the basis of an example. In the next edition of our magazine, a report will follow on the structuring options available during one’s lifetime in order to optimise the consequences in the event of death.
Key data of the practical case study
A married couple lives under the statutory matrimonial property regime of the community of accrued gains without a last will and testament. At the start of the marriage, both of them each have assets of € 100k. Early on, the husband inherits securities (€ 400k) and an undeveloped plot of land (€ 200k). Subsequently, the couple jointly finance the construction of a single-family home on the plot. The construction costs amount to € 500k and are financed by € 200k from the initial assets of both the spouses, and by € 300k of assets that were jointly generated. Under civil law, the plot of land is solely owned by the husband. The spouses have one child together who, at the time of death, no longer lives at home. The assets have performed as follows:
|
Item |
Origin |
Original value |
Final value |
|
Securities |
Husband’s inheritance | € 400k | € 1,000k |
|
Plot of land Building (single-family home) |
Husband’s inheritance, jointly financed |
€ 200k € 500k |
€ 1,000k |
| Joint assets | jointly generated | € 3,000k |
Determination of the accrued gains
Criteria
By operation of law, spouses are subject to the matrimonial property regime of the community of accrued gains insofar as they have not made different matrimonial property arrangements via a nuptial agreement (Section 1363(1) of the Civil Code [Bürgerliches Gesetzbuch, BGB]). Within the community of accrued gains, each spouse’s assets remain their sole property. No commingling of assets takes place. Upon the termination of the matrimonial property regime, it is only the asset growth achieved during the marriage - the so-called accrued gains - that are equalised. The community of accrued gains is terminated by divorce, contractual cancellation by means of a nuptial agreement, or the death of one of the spouses (Section 1371 BGB).
For the calculation of the accrued gains, inheritances and gifts are deemed to be the respective spouse’s initial assets (Section 1374(2) BGB). By contrast, the appreciation in the value of the initial assets is deemed to be an accrued gain (Federal Court of Justice ruling of 25.10.2001, case reference: IX ZR 11/01). In the case in point, this applies to both the securities (increase of € 600k) as well as the plot of land with a building (increase of € 300k). Since the plot of land was owned solely by the husband M, it has to be fully recorded in his statement of assets. Under German civil law, investing joint funds in M’s property does not establish joint ownership with the wife F.
The calculation in the event of a divorce
If there is a divorce, the equalisation of accrued gains is calculated by deducting the value of the initial assets (incl. any inheritance received during the marriage) together with any debts from the value of the final assets (incl. the appreciation in the values). Based on the specific data, and as shown in the overview table below, this results in a claim to equalisation by F in the amount of € 700k.
|
Item |
Husband |
Wife |
|
| Initial assets |
€ 700k (100 + 400 + 200) |
€ 100k | |
| Final assets |
€ 3,500k (1,000 + 1,000 + 1,500) |
€ 1,500k |
|
| Accrued gain | € 2,800k | € 1,400k | |
| Difference | € 1,400k | ||
|
Claim to equalisation by the wife |
€ 700k |
Husband’s death and a blanket equalisation of accrued gains
If the husband predeceases the wife, then M’s assets would basically first go to a community of heirs (Section 2032(1) BGB) consisting of F and the child. The division of the inheritance occurs within the framework of a so-called partition of the estate (Section 2042(1) BGB).
Civil law consequences
If a spouse dies without the matrimonial property being partitioned, then the equalisation of accrued gains would basically be notionally compensated on a blanket basis (Section 1371(1) BGB) via an increase in the statutory share of the inheritance. As the couple had a child together, under Section 1931(1) BGB, the wife would normally inherit ¼ of the estate. By applying Section 1371(1) BGB this portion of the estate goes up by a flat rate of another quarter.
At the time of M’s death his entire estate, worth € 3,500k, is bequeathed. Both the wife as well as the child each receive € 1,750k. The accrued gains are not equalised separately because these have been compensated by the increased share of the inheritance. F thus does not have an independent claim for an equalisation payment.
Inheritance tax consequences
If the equalisation of accrued gains is settled under inheritance law via a flat-rate increase by one quarter in the spouse’s portion of the estate (Section 1371(1) BGB), then the surviving spouse would be able to deduct not just their own personal tax-free allowance but, in addition, a tax-exempt amount that corresponds to the size of the claim for the equalisation of accrued gains (Section 5(1) of the Inheritance and Gift Tax Act [Erbschaft- und Schenkungsteuergesetz, ErbStG]; guideline and comment 5.1 ErbStR 2019). However, in sentence 6 of Section 5(1) ErbStG, a reduction in the tax-free allowance is provided for in the case of an acquisition of tax-privileged assets. In this way, the surviving spouse should be prevented from benefitting twice from tax concessions, namely, from the (notional) tax exemption for the equalisation of accrued gains and the, to some extent, tax-privileged inheritance (e.g., their own home).
To counter this accumulation of tax concessions, in accordance with sentence 6, the value of the assets that are not tax-exempt is set in proportion to the total assets. The resulting percentage must be applied to the equalisation claim that has been determined. Consequently, only the amount of accrued gains that correspond to this percentage can be equalised free of tax. In the present example this would result in the following reduction:
- Wife’s inheritance: € 1,750k
• thereof exempted from tax: € 500k (own home 50%)
• thereof not exempted from tax: € 1,250k - Percentage not exempted from tax: 71.43 % (1250/1750)
- Accrued gain not reduced: € 700k
- Reduced accrued gain: € 500k (71.43 % of € 700k)
Under 13(1) no. 4b ErbStG, bequeathing the own-used single family home to the spouse would be tax-exempt if
- the deceased had used the property for their own residential purposes,
- the surviving spouse is still using the property themself for their own residential purposes, and
- the self-use continues for at least ten years.
This would also apply if the property belongs solely to the testator, provided that it had been used as a joint family home (Federal Fiscal Court ruling of 1.12.2010, case reference: II R 23/10).
The remaining part of the inheritance (securities and cash assets) is subject to tax, whereby the tax-free allowance for spouses (€ 500k pursuant to Section 16(1) no. 1 ErbStG) and for children (€ 400k pursuant to Section 16(1) no. 2 ErbStG) is taken into account.
The calculation of the amounts subject to inheritance tax
In the case study, while the community of heirs keeps going, the inheritance tax for the heirs would be as follows:
- Wife - The € 500k share in the family home is tax free. Of the remaining part of the inheritance in the amount of € 1,250k, after deducting the tax-free allowance of € 500k, € 750k is taxable. From this amount it is possible to deduct a tax-free allowance that corresponds to the reduced claim for the equalisation of accrued gains (€ 500k).
- Child - Of the total inheritance in the amount of € 1,250k, after deducting the tax-free allowance (€ 400k), the taxable amount is € 850k.
- Therefore, inheritance tax will be levied on an overall amount of € 1,100k (850 + 250). This results in an amount of € 189k (250,000 * 11% = 27,500 and 850,000 * 19% = 161,500).
