The inheritance tax exemption for a family home is not waived if it is unreasonable for the heir to use the property themselves. The Federal Fiscal Court decided this in a ruling dated December 1, 2021 (Ref.: II R 18/20).
The family home can be inherited tax-free if certain conditions are met. This includes, among other things, that the heir uses the inherited family home immediately themselves for residential purposes for at least ten years, explains the law firm MTR Legal. If the heir moves out during this ten-year period, the inheritance tax is due retroactively unless the heir has a compelling reason for moving out.
Such a compelling reason may exist not only when it is impossible for the heir to use the family home, but also when it is no longer reasonable for them, as the Federal Fiscal Court has now clarified.
In the underlying case, the plaintiff had inherited the family home from her father and lived there. However, after seven years, she moved out and the house was demolished. She argued to the tax office that she could barely move around the house due to her health condition and therefore could not live there without external help. Nevertheless, the tax office demanded the inheritance tax. The competent financial court confirmed the claim: there was no compelling reason for moving out, as the plaintiff could have availed herself of external help. Therefore, the exemption from inheritance tax was waived.
However, the Federal Fiscal Court viewed this differently, overturned the ruling, and referred the case back to the financial court. The inheritance tax exemption requires, according to § 13 Para. 1 No. 4c of the Inheritance and Gift Tax Act, that the heir uses the inherited family home themselves for ten years, unless they are prevented from doing so for ‘compelling reasons.’ Compelling includes not only the impossibility but also the unreasonableness of using the family home themselves, the BFH clarified.
Purely economic considerations are not sufficient for unreasonableness. However, it is different if the heir, for health reasons, requires so much help to continue using the family home that independent household management is no longer possible, according to the BFH. The financial court must now examine that.
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