Consecutive gifting - Introduction
When it comes to tax planning, consecutive gifting or "Kettenschenkung" can be an attractive way of optimizing the use of tax brackets and personal tax allowances.
This concept allows for the transfer of assets to family members over time, which can help to keep the gift tax burden low and preserve family assets.
Recently, the German Federal Fiscal Court clarified the conditions for consecutive gifting in its ruling (dated July 28, 2022 - II B 37/21).
What happened?
The case that was brought before the court concerned the donation of a house by a father to his daughter, who then donated half of the house to her husband.
The tax authorities argued that the father's donation must be taxed as if he had donated half of the house directly to his son-in-law. This would have resulted in a higher tax burden for the son-in-law, as the tax allowance for family members is higher than for third parties.
However, the court clarified that the determination of the respective donor and beneficiary in cases of consecutive gifting is based on whether the person passing on the asset has an independent decision-making power regarding the disposal of the gifted asset.
Therefore, a valid consecutive gift structure requires at least two successive gifts that are legally effective, and the intermediary donee must obtain the right to fully dispose of the gifted assets without any obligation to transfer them to another person.
What is consecutive gifting?
Consecutive gifting can be an effective structure in cases where a direct gift would lead to an increased gift tax burden. However, it is important to carefully consider the requirements established by case law in order to achieve the intended tax benefits.
If the intermediary donee intends to pass on the gift to another person, close attention must be paid to the implementation of consecutive gift arrangements.
The contractual agreements must clearly emphasize the power of disposition of the first donee, and all provisions must be avoided that could result in an obligation of the first donee to transfer all or part of the gift to another person.
It is worth noting that the potential for tax optimization is not limited to private assets but can also be used for tax planning in the context of business succession.
The personal allowances under the German Inheritance and Gift Tax Act are higher among family members than among third parties, which can be effectively utilized to minimize the tax burden and preserve family assets.
Consecutive gifting - Conclusion
Consecutive gifting can be a valuable tool for tax planning and asset preservation, but it is important to carefully consider the legal requirements and contractual agreements in order to achieve the intended tax benefits.
With the right approach, this concept can be a powerful strategy for families and businesses alike.
If you have any queries about consecutive gifting in Germany, or German tax more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.