In a specific case, the claimant had inherited six plots of land of which five were shown as one parcel in the land register. In the valuation for inheritance tax purposes, the local tax office pooled three of the five plots that had been combined in the land register and had determined a total value for these three. In the inheritance tax assessment notice that was subsequently issued by the inheritance tax office the value of the plot of land on which the family home had been built was stripped out from the total value of the three plots and the heirs were granted a tax exemption solely for this amount in accordance with Section 13(1) no. 4c sentence 1 ErbStG.
The tax court in Lower Saxony, in its judgement of 12.7.2023 (case reference: 3 K 14/23), rejected the legal action brought against this assessment by the heirs and ruled that the tax exemption has to be based not on the economic unit as defined in German valuation law but, instead, on the smaller cadastral area. The reasons provided by the judges were, firstly, the primary linkage of inheritance tax law to civil law and, secondly, the restrictive interpretation of the exemption provision in Section 13(1) no. 4c sentence 1 ErbStG that is required under constitutional law. People with large family homes should not be unduly favoured as compared with people with smaller family homes.
In the opinion of the tax court judges, the inheritance tax office had rightly exempted from tax solely the actual plot of land on which the family home had been built. In view of the fundamental importance of the case the tax court granted permission for it to be referred to the Federal Fiscal Court (Bundesfinanzhof, BFH) for an appeal; it is pending there under case reference: II R 27/23.
Please note: The favourable treatment of family homes for inheritance tax purpose is one of the most significant tax exemptions for property owners. It remains to be seen what the BFH’s ruling will be in this respect.