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TAX IMPLICATIONS FOR UK AND IRISH INVESTORS IN GERMANY -
December 2006
The advice detailed below applies to UK and Republic of Ireland resident individuals who
have purchased German residential property and whose sole income in Germany is derived from
rental income.
THE TAXATION OF THE UK AND IRISH INVESTOR
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Investors are liable for income tax on chargeable rental income and income tax on chargeable gains made on disposal. |
| Germany has concluded a double taxation agreement with both the UK and Ireland. |
| Accordingly, income tax paid in Germany on real estate income or gains is a credit against UK and Irish income tax. |
| Income tax rates on rental income are 25% up to approx. €25,000. Thereafter, they are applied on a sliding scale depending on the taxable amount. |
| Income tax on capital gains does not apply if property is owned for more than 10 years. Otherwise income tax rates apply in Germany. |
| The German tax year runs parallel to the calendar year and the due deadline for filing is 31st May of the following year. |
RENTAL INCOME CALCULATIONS
| Income Tax Rates | ||
| Taxable Income | Income Tax | Solidarity Surcharge |
| €5,000 | €1,250 | €55 |
| €25,000 | €6,679 | €367 |
| €50,000 | €16,306 | €896 |
Assume purchase price of €100,000 (€80,000 for building and €20,000 for land)
| Example with 60% loan at 4.9% | Example with no loan on property | ||
| €4,600 | Rental Income | €4,600 | Rental Income |
| €1,600 | Depreciation 2% of 80,000 | €1,600 | Depreciation 2% of 80,000 |
| €357 | Management Charges | €357 | Management Charges |
| €297.50 | Tax Adviser Fee | €297.50 | Tax Adviser Fee |
| €500 | Travel Expenses | €500 | Travel Expenses |
| €2,900 | Loan Interest | ||
| -€1,054.50 | Taxable Income | €1,845.50 | Taxable Income |
| -€1,054.50 | Loss carried forward (no German tax payable) | €461.37 | Income Tax Due |
Income tax payable in Germany is a credit against your UK or Irish income tax liability.
CAPITAL GAINS CALCULATIONS
Assume purchase price €100,000 (€80,000 for building and €20,000 for land)
Incidental costs of Acquisition €6,000
Assume selling after five years
Depreciation: 2% per annum of €80,000 over 5 years = €8,000
Book Value = €98,000 (€100,000 and €6,000 minus €8,000)
| Selling Price | €125,000 | €150,000 | €175,000 | €200,000 |
| Book Value | €98,000 | €98,000 | €98,000 | €98,000 |
| Capital Gains | €27,000 | €52,000 | €77,000 | €102,000 |
| Income Tax | €7,343 | €17,153 | €27,646 | €38,145 |
| Solidarity Surcharge | €404 | €943 | €1,521 | €2,098 |
| Approx tax % | 28.7% | 34.8% | 37.8% | 39.5% |
Under current legislation if you own the property for 10 years or more, then no German
income tax is payable on capital gains.
There are significant German tax advantages if real property is held for more than 10 years.
The new Government has proposed reform to the taxation of capital gains. Under discussion is
the introduction of a 25% flat rate for gains on shares and securities acquired after January 1,
2009. It is yet to be seen whether the goverment wishes to extend this to include real property.
Please note that the UK treatment of the German tax paid on capital gains differs from that
of Ireland.
UK Resident Investors -
Income tax payed on capital gains in Germany is a credit against your UK capital gains tax
liability
Irish Resident Investors -
Any German tax payable is a deduction from the chargeable capital gains.
INHERITANCE TAX (IHT) / CAPITAL ACQUISITIONS TAX (CAT)
UK or Irish investor whose only asset in Germany is a rental property. It is not intended to be an
exhaustive explanation and detailed advice should be sought from a tax expert for individual
circumstances.
Three potential scenarios:
1. Owner marries and subsequently dies and apartment left to spouse and/or children and/or
parents
2. Owner dies and apartment left to family members e.g. brother or sisters
3. Owner dies and apartment left to friend
In all of the above scenarios IHT/CAT is payable in Germany as set out in the following table.
Note the value of the apartment for the purpose of the calculation of tax is deemed to be 12.5
times the annual rent less allowable depreciation.
There are three classifications for the purpose of calculating the tax rate applicable.
| Classification | Deemed apt value of less than €52,000 |
Deemed apt value of €52,000 to €256,000 |
Deemed apt value of €256,000 to €512,000 |
| 1. Apartment inherited by parent, child, spouse |
7% |
11% |
15% |
| 2. Apartment inherited by brother / sister |
12% |
17% |
22% |
| 3. Apartment inherited by friend |
17% |
23% |
29% |
Assumptions :
1. Apartment in single name;
2. Purchased for €100,000 and currently worth €150,000;
3. Annual rent is €5,500;
4. The value of the apartment for the purpose of the calculation of tax is deemed to be 12.5
times the annual rent less allowable depreciation minus €1,100 allowance. Lets assume
depreciation is €5,000 (0.5% per year of apartments age, max. 25%) then the deemed
value is €63,750;
Tax payable for each of the three classifications above is as follows:
1. Parent/Spouse/Child at 11% equals tax bill of €6,892. If wife already 50:50 owner then
tax bill is reduced to 7% i.e. €2,154
2. Brother/Sister at 17% equals €10,651
3. Friend at 23% equals €14,410
Please note that a mortgage or secured loan charged against the property is deductible from its
taxable value.
Any IHT/CAT paid in Germany is treated as a tax credit in the event that any UK/Irish
Inheritance tax or Capital Acquisitions Tax is payable.
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TAXATION FOR REAL ESTATE INCOME
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