A new beginning after separation - personal and tax decisions
Our client - a thirty-something professional who has been developing her career in Germany for three years and co-owns a flat in London - faced one of the most difficult choices of her life. Faced with the break-up of her marriage, she is wondering where best to position her future so that she is not overwhelmed by the tax consequences. All the more so as new factors loom on the horizon: her parents from Poland pledge financial support for the purchase of a flat, and in the background the question of the inheritance family home and savings.
It is at such moments - in the shadow of a private crisis - that decisions are taken whose fiscal impact can mean a difference of hundreds of thousands of euros.
Gift tax from parents - Poland, Germany or England?
Tax exemptions in Poland - nil group and formalities
In Poland it is mandatory inheritance and gift taxThe tax exemption does not apply in the case of a gift or inheritance, but in the case of a parent-child relationship, there is a full tax exemption provided that the formalities are complied with, i.e. the fact that the gift or inheritance was registered at the so-called "tax office". form SD-Z2. If the child reports the acquisition of the donation in due time and documents the flow of money, the Polish tax will not reach for a single zloty.
Or maybe you are also interested in the succession procedure within the EU and EU solutions for the acquisition of an inheritance? Take a look here: https://bktkancelaria.pl/transgraniczne-postepowanie-spadkowe/
Free amount in Germany - € 400 000 and tax thresholds
In Germany, a child can receive from each parent up to EUR 400,000 tax-free, and this limit renews every 10 years. If the donation is larger, the excess falls into the progressive taxation scale (rates 7-30%). Unfortunately, the lack of a Polish-German double tax treaty on inheritances and donations means that the Polish exemption does not protect against the German tax. Therefore, with large donations, often a lack of thoughtful succession can lead to the need for high taxation.
England and no gift tax on the part of the donee
In the UK, donations are not taxed on the part of the recipient. They can be added to the donor's estate if the donor dies within 7 years of the transfer. If, on the other hand, the parents live in Poland and intend to transfer the funds from Poland - the UK will, in principle, not be able to impose tax on the children being British residents. This is because both the money and the donors are from a country other than the UK.
Family loan instead of donation - a solution in Germany
Loan from a parent (Darlehensvertrag) is a legal solution in Germany, but requires a written agreement specifying the amount, repayment dates and other repayment conditions. The loan should be real - that is, in the event of an audit, the tax office in Germany will examine whether there has been an actual transfer of funds, whether a repayment schedule and even symbolic instalments have been agreed, and whether these instalments are actually being repaid. Otherwise, the tax office may treat such a loan as hidden donation and add it to the €400,000 limit over 10 years.
Inheritance of parents from Poland - Tax residency effects
Exemption in Poland for children - key form SD-Z2
In Poland, an inheritance from parents to children, like a donation, is exempt from tax if it is properly and timely reported to the tax office on form SD-Z2.
Will vs. donation: https://bktkancelaria.pl/testament-a-darowizna/
German inheritance tax - progression for large amounts
German tax resident inheriting from a Polish parent pays tax on the entire inheritance, less the free amount (EUR 400 000 per parent). The excess is subject to progression - leaving often several per cent of the value of the estate to be paid to the tax authorities.
English IHT system - no tax on overseas inheritance
IN THE UK Inheritance Tax (IHT) applies to estates from UK-related individuals who are UK residents. If the parents lived in Poland and the estate is also in Poland - the UK should not charge any tax.
Property in London - sales, leases and taxes
UK Capital Gains Tax versus Private Residence Relief
Selling a flat in London can generate Capital gains tax (CGT)but if the property was your main residence, the following applies in this case Private Residence Relief.
German Spekulationsfrist - sale after 10 years
In Germany, the sale of private property is tax-free after 10 years from acquisition (so-called speculationsfrist).
How do you plan for the decision to sell your home in the UK?
The decision to sell should take into account the current place of tax residence and having evidence of the status of the main residence in order to benefit from the relief.
The most common mistakes when planning gifts and inheritances from Poland
Error 1: Failure to declare SD-Z2 in Poland
Failure to declare, i.e. to inform the tax office in Poland of an acquired donation or inheritance, may result in a loss of entitlement to exemption and charge the tax in full. The deadline for submitting form SD-Z2 is 6 months from the date on which the tax liability arose (i.e. receipt of a donation, for example) or 6 months from the date on which the court decision on the acquisition of the inheritance became final.
Mistake 2: Fictitious loan in Germany
A loan agreement without real repayments and actual transfers is treated by the German tax as a sham donation. If the parties sign a loan agreement but there is no transfer of money, the tax office investigates whether a legal transaction has actually taken place. The absence of actual transfers makes such a 'loan' a sham in the opinion of the tax authorities in Germany.
Error 3: Late change of tax residence before inheritance
A late change of tax residence can have very serious financial consequences. If the heir, at the time of the testator's death, has a status of German tax residentis subject to German inheritance tax on total assets - regardless of where it is located. Early planning and formally relocating the centre of life interests to Poland or another country with more lenient regulations is therefore key.
Donation and inheritance from Poland - Frequently Asked Questions (FAQ)
Is a donation from my parents from Poland always taxed in Germany? Not always. Germany has a high tax-free amount of €400,000 from each parent, which renews every 10 years. This means that a child can receive a total of €800,000 from both parents tax-free. Only the excess over this amount is taxed.
Why do I have to report the donation in Poland on form SD-Z2 if it is tax exempt? Notification on form SD-Z2 is a formal condition for taking advantage of the tax exemption under the so-called zero tax group. Without timely notification (within 6 months), the tax office will charge tax on a general basis, as if the exemption did not apply.
I live in the UK and have received an inheritance from Poland. Will I pay tax in the UK? As a rule, no. If the testators (e.g. parents) were resident in Poland and their assets are located there, UK Inheritance Tax should not apply to the UK resident heir.
Is a loan from family a good way to avoid gift tax in Germany? This can be an effective tool, but it must be done correctly. There must be a written agreement, actual cash transfers (both of the loan and instalments) and the loan itself should be real (e.g. include even a symbolic interest rate). Otherwise, the German tax office may regard it as a disguised donation.
Bottom line - when is Germany better and when is England better?
In summary, if your key objective is to receive a donation or inheritance from Poland calmly and free of excessive formalities, The UK offers greater tax security. The UK system does not impose tax on gifts or inheritances received from abroad. W Germany in turn operate relatively high free amountswhich, in the case of smaller inheritances or gifts, can have a protective effect. However, with larger estates, the German tax burden becomes tangible and can seriously deplete the value of the inherited property.
Therefore, the German model will work well for moderate wealth transfers, but for large fortunes the British solution proves more beneficial.
Arrange a consultation with our law firm https://bktkancelaria.pl/porady-prawne-online-2/ - We will analyse your situation and suggest whether it would be more advantageous to reside in Germany or in England.
