Inheritance tax in focus: current developments before the Federal Constitutional Court

Application for abstract judicial review by the Bavarian State Government

In proceedings 1 BvF 1/23, the Bavarian State Government first calls into question the Federal Government's legislative competence for certain provisions of the German Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz – ErbStG). Specifically, the application concerns the rules on the valuation of real estate (Sec. 12 (3) ErbStG), the personal allowances (Sec. 16 (1) ErbStG) and the tax rates (Sec. 19 (1) ErbStG). This also corresponds to the officially published subject matter of the proceedings.

The Federal State of Bavaria does not consider uniform federal regulation of these provisions to be necessary and is calling for greater regulatory latitude for the federal states. Counterarguments raised against this included, in particular, that divergent state rules could lead to additional complexity, tax-driven relocations of residence and tax competition between the federal states.

The proceedings also concern the substantive design of inheritance tax. Bavaria criticises, in particular, that the personal allowances and tax bands have not been adjusted since 2009 despite considerable increases in prices and asset values. The failure to take account of regional differences in property prices is also among the constitutional objections raised in the application. Significant regional variations in property values in particular could mean that comparable transfers of wealth are subject to markedly different tax burdens.

Constitutional complaint against the relief for business assets

The second set of proceedings, 1 BvR 804/22, concerns the preferential tax treatment of business assets. The complainant had inherited exclusively private assets from his aunt and argues that he is being discriminated against, in breach of the principle of equal treatment, compared with heirs of qualifying business assets. The proceedings therefore address the question of whether the relief granted on the transfer of business assets results in constitutionally relevant discrimination against acquirers of non-qualifying assets.

As early as 2014, the BVerfG approved the relief for business assets in principle, but declared parts of its design at the time unconstitutional. The legislator responded in 2016 with new legislation. Since then, acquisitions of qualifying assets of up to EUR 26 million in particular can, in principle, continue to be exempted from inheritance tax at 85 per cent and, subject to stricter conditions, at 100 per cent (Secs. 13a, 13b ErbStG). For acquisitions exceeding this threshold, special rules are available in the form of the tapering relief model (Sec. 13c ErbStG) and the relief needs test (Sec. 28a ErbStG).

During the hearing, the Court focused in particular on the relief provisions for business assets. The official hearing outline expressly lists the standard relief and optional full relief, the tapering relief model, the relief needs test, the upfront deduction for family businesses, the concept of non-qualifying (administrative) assets and the payroll requirement. Statistical data and the actual impact of the relief provisions were also on the agenda. 

Among other things, it was discussed whether the need for relief should be assessed more by reference to the business itself rather than to the financial circumstances of the acquirer. The accuracy of targeting and the complexity of the existing relief provisions were also addressed. The experts expressed, in some cases, markedly differing views on these issues. A recurring point was also the insufficient empirical data on the actual impact of inheritance tax on businesses, investment and jobs.

Assessment and expectations

Based on the current state of affairs, we consider the application for abstract judicial review to have little prospect of success. In our view, a loss of the Federal Government's legislative competence in particular appears unlikely; however, should the Court rule accordingly, this would have far-reaching consequences and would require a complete overhaul of inheritance tax. 

The BVerfG's decision remains to be seen

With regard to the constitutional complaint, it remains to be seen in particular how the Court will assess the relief for large business assets. Conceivable outcomes include requirements regarding the EUR 26 million threshold or a more business-focused design of the relief needs test.

The decisions will show whether, and to what extent, the proceedings give rise to a need for amendments to current inheritance tax law. Entrepreneurs are therefore advised to monitor further developments closely and to review upcoming business successions at an early stage in light of the proceedings.

The BVerfG's decisions are not expected until next year.