Inheritance tax benefits for housing companies only with binding information (Münster tax court)

Inheritance tax benefits for housing companies can now practically only be implemented with binding information due to restrictive case law (Münster tax court of 10.10.2024)

In its judgement of 10.10.2024 (Ref. 3 K 751/22) imposes extremely strict requirements on the conditions for the existence of a housing company that benefits from inheritance tax.

Background

In principle, entrepreneurial assets are favoured for inheritance and gift tax purposes under certain conditions. Properties transferred to third parties for use are not favoured for inheritance tax purposes as so-called administrative assets. An exception is made for so-called housing companies, whose properties do not constitute administrative assets. In order to qualify as a housing company, the law requires that the main purpose of the business is the letting of flats, the fulfilment of which requires an economic business operation (Section 13b (4) no. 1 sentence 2 letter d ErbStG). In this way, extensive property portfolios can be transferred to the next generation in a tax-privileged manner.

View of the tax authorities

The tax authorities assume that if the 300-object limit is exceeded, i.e. if there are more than 300 owner-occupied properties, the letting of the flats constitutes a commercial business and therefore a residential property company (R E 13b.17 para. 3 sentence 2 ErbStR).

Judgement of the BFH from 2017

With the judgement of 24 October 2017 (Ref. II R 44/15), the BFH established its own criteria for a favoured residential rental company. According to these criteria, flats that a residential property letting company lets to third parties for use only belong to the favoured assets if, in addition to letting as part of a commercial business, the company provides additional services that exceed the usual level for long-term lettings, in contrast to pure letting activities as private asset management. The number of rented flats is therefore irrelevant.

The tax authorities have provided this judgement with a so-called non-application decree, i.e. they do not apply it beyond the individual case decided.

Facts and judgement of Münster tax court dated 10/10/2024

In its judgement of 10.10.2024 (Ref. 3 K 751/22) imposes extremely strict requirements on the conditions for the existence of a commercial business with the main purpose of letting its own flats. Despite significant additional commercial services, no commercial business operation could be assumed. Furthermore, the number of flats is also irrelevant according to the BFH case law from 2017 (exclusively qualitative perspective).

In the facts of the judgement, shares in a Besitz GmbH & Co. KG, which holds extensive real estate that it lets to third parties for residential purposes. From an income tax perspective, the company originally generated commercial income, as it provided special commercial services in addition to the provision of residential property:

• Supply of self-produced or purchased energy (incl. provision of house connections)
• Provision of SAT systems, antennas or Internet connections
• Maintenance of the caretaker service, maintenance of the green areas and cleaning of the communal areas as well as regular checks of the properties, e.g. those located in hotspot areas.
• Offer of tradesman services at the request and expense of the landlord
• Co-leasing of kitchens, kitchen units or other furniture and the provision of a related spare parts warehouse

The tax office denied the existence of a commercial business operation, in particular due to the fact that the value of the flats fell just short of the 300-property limit (quantitatively) and insufficient special services (qualitatively), and therefore recognised the flats as (harmful) administrative assets.

The Münster tax court agreed with the tax office and denied the existence of a residential property company for qualitative reasons.

Valuation

In practice, the restrictive interpretation of the status of a housing company by the courts means that housing companies should currently only be transferred on a preferential basis with binding information. In the case of more than 300 owned flats, the tax authorities would still have to be forced to issue a positive binding ruling on the basis of their guidelines. In the case of fewer than 300 owned flats, the chances of obtaining binding information would have to be weighed up on a case-by-case basis.

In the further course, the appeal before the BFH (Ref. II R 39/24) and await the reaction of the tax authorities. A more restrictive application of the case law and a clarification of the tax authorities' own legal opinion would be desirable.

Ultimately, the preferential inheritance tax treatment of residential property (companies) remains a costly and risky undertaking, which is why investments in other asset categories with legally secure preferential treatment are currently becoming even more attractive for investors with the aim of optimising inheritance tax.

Yours TAXGATE team assists wealthy individuals and family businesses with complex tax issues and represents their interests vis-à-vis the tax authorities. RA/StB Markus Schenk and StB Stephan Scheffold are in charge of various company and asset succession cases at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.