The inheritance is gone, but the tax remains? – Federal Fiscal Court ruling on the cut-off date principle for inheritance tax

An heir may, under certain circumstances, have to pay inheritance tax even though they have received hardly anything from the estate. In principle, the value of the estate on the date of the testator’s death is decisive – this is known as the ‘cut-off date’ principle. This principle is applied strictly. Subsequent losses in value, unfavourable stock market performance or economic difficulties following the opening of the succession do not, as a rule, alter the tax liability once it has been determined.

A recent judgement by the Federal Fiscal Court (BFH) dated 25 February 2026 (Case No. II R 1/22) illustrates just how harsh this can be in individual cases. A reduction in inheritance tax on so-called grounds of equity can only be considered if an heir is deemed to have been enriched for tax purposes but, through no fault of their own, is in fact left with nothing financially.

The case was based on exceptional circumstances. Due to an initially incorrect certificate of inheritance, other individuals came into possession of the estate and depleted its assets. It was not until years later that it was legally established who the actual heir was. By that time, hardly anything remained of the original estate. Nevertheless, the tax office assessed the inheritance tax on the basis of the value of the estate on the date of death. This is precisely in line with the statutory ‘cut-off date’ principle.

The Federal Fiscal Court (BFH) clarified that, in such an exceptional case, a different tax assessment may be possible on grounds of equity. The hurdles are, however, high. The heir must demonstrate, and where necessary prove, that they are not at fault for the loss of the estate, that they undertook all reasonable steps to safeguard the estate, and that they pursued any possible claims for restitution or compensation. The tax court must now further investigate whether these conditions were met.

For most inheritance cases, therefore, the ruling does not amount to a free pass. Normal losses in value following the death – for example, in securities portfolios, property or business shareholdings – do not, as a rule, reduce the inheritance tax liability. Even if many months or more than a year elapse between the date of death and the tax assessment, the value on the date of death remains the decisive factor. This poses a risk for estates consisting predominantly of assets subject to fluctuation.

Heirs should therefore assess at an early stage what tax liability is likely to arise. This involves not only the value of the estate, but also tax allowances, tax brackets, estate liabilities and the valuation of individual assets. Particularly in the case of property, company shares or securities portfolios, a rough calculation following the death can help to avoid liquidity shortfalls in the future.

The practical tax advice is therefore that heirs should set aside the expected tax liability from the rest of the estate as early as possible. Once the inheritance tax assessment has been received, there is usually only a payment deadline of around one month. 

Anyone who has not secured the necessary liquidity by then may have to sell securities or other assets at an unfavourable time.

If there are liquid funds in the estate, it may make sense to invest the estimated tax amount in a secure manner that allows for short-term access, such as in a call money account or a short-term fixed-term deposit. This ensures that the liquidity required for the subsequent tax payment is maintained, even if markets or assets perform poorly in the run-up to the tax assessment notice.