If you live abroad and own a property in Germany, sooner or later you search for „inheritance tax allowance limited liability“. You will very often read the figure 2,000 euros. That figure has not been in the statute since 2017.
Until 2017, §16(2) of the German Inheritance and Gift Tax Act (ErbStG) contained a sentence that was easy to remember and easy to quote: under limited tax liability, the normal allowance is replaced by an allowance of 2,000 euros. The European Court of Justice struck this rule down several times — it breached the free movement of capital. The legislator deleted it with the Tax Avoidance Prevention Act; the new version applies to acquisitions for which the tax arose after 24 June 2017.
And yet you still find the 2,000 euros to this day on advice sites, in forums and even in statute collections that never updated their text. This is not a marginal problem: anyone planning with that figure is planning on a legal position that has not existed for eight years — and arrives at a result that is either far too pessimistic or, depending on the constellation, dangerously optimistic.
Nothing here is tax advice. We are mortgage brokers (§34i GewO), not tax advisers. This text places the legal position in context so that you can ask the right questions — binding information comes from your tax adviser or the tax office. What we can assess, and do assess, is the role your financing plays in this.
If neither the deceased or donor nor the recipient lives in Germany, limited inheritance and gift tax liability applies (§2(1) no. 3 ErbStG). What is then taxed is not worldwide wealth but only domestic assets within the meaning of §121 of the Valuation Act (BewG). That list is exhaustive — and the practically most important item in it is domestic real property. Your German property is therefore the point of connection.
What is notable is what does not belong to it: a credit balance at a German bank is — in itself — not a domestic asset within the meaning of this provision. The property is. That explains why wealth that „feels the same“ in Germany is treated very differently for tax.
A point that is regularly overlooked: German nationals who have been permanently abroad for no more than five years still count as residents (§2(1) no. 1 lit. b ErbStG) — with the consequence of unlimited tax liability on worldwide wealth. Anyone who moved to Dubai in 2023 is, from the perspective of German inheritance tax law, still a resident in 2026. For US connections, a ten-year period can even apply via the supplementary protocol to the Germany–US estate tax treaty.
§16(2) ErbStG in its current form says: the allowance under subsection 1 — the same 500,000 € for spouses, 400,000 € for children, 200,000 € for grandchildren, 100,000 € for the other persons in tax class I, 20,000 € for tax classes II and III — is reduced by a part-amount under limited tax liability. That part-amount corresponds to the ratio of the assets not subject to limited tax liability to the total assets acquired from the same person within ten years.
In plain terms: you receive the full allowance pro rata — in the proportion in which the German assets stand within the total acquisition. Anyone who leaves only a German property and nothing else is in a very good position. Anyone who also transfers substantial foreign assets sees the allowance shrink.
| Until 2017 (still read everywhere) | Today (§16(2) ErbStG) | |
|---|---|---|
| Allowance | flat 2,000 € | the same as under unlimited liability — reduced pro rata |
| Reference figure | none | share of foreign assets in the total acquisition, ten-year view |
| Right to elect | §2(3) ErbStG (option for unlimited liability) | abolished — deleted in the same act |
Legal position: ErbStG as in force, checked on 14 July 2026 (gesetze-im-internet.de). Whether the pro-rata reduction, too, is compatible with the free movement of capital is disputed and the subject of further proceedings — the last word has not been spoken here.
Up to here it is tax law. Now comes the part that concerns us — and that appears in none of the guides telling you about the 2,000 euros.
Under §10(6) sentence 2 ErbStG, under limited tax liability debts and encumbrances are deductible only in so far as they are economically connected with the domestic assets. This is no formality. It is the difference between „the property is taxed at its full value“ and „what is taxed is what remains after the loan is deducted“.
A loan that is secured by a land charge on the German property and served the acquisition or renovation of precisely that property has this economic connection. A credit someone took out abroad and „somehow also used“ may not — even where the money demonstrably flowed into the same property. The connection must follow from the substance, not from the intention.
A model-type classification, not tax advice and not a financing commitment. Whether and to what extent a deduction of debt is recognised is decided by the tax office in the individual case.
This is why, where there is a foreign element, we do not only ask whether a financing can be arranged, but how it is structured. The answer to the second question can be worth more decades later than a tenth of a percent on the rate.
Property let for residential purposes is assessed at a reduced value — and this relief is available to persons with limited liability as well. In 2023 the ECJ (C-670/21) even clarified that it must not fail because the property lies in a third country. Anyone who does not claim it gives it away.
The acquisition must be notified to the inheritance tax office — even where tax only possibly arises. With a foreign element this is readily overlooked, on the assumption that „the German tax office will not find out anyway“. It does find out.
Unlike income tax, there are very few double-taxation treaties in the field of inheritance tax. That leaves §21 ErbStG: crediting foreign tax — under narrow conditions. Double burden is no theoretical risk here.
Why banks decline citing the mortgage credit directive — and when that reasoning does not hold.
Loan-to-value, credit standing and rental income when your residence is abroad.
Country pages: EU, Switzerland, the UK, USA/Canada, the UAE and more.
Then the question of how the financing is structured belongs at the start — not at the end. We look at your case before you sign.
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