Is inheritance tax unconstitutional again?

Most recently in 2014, the Federal Constitutional Court declared inheritance tax to be partially unconstitutional due to the regulations on preferential treatment for companies (judgement of 17 December 2014, 1 BvL 21/12). The favoured treatment of companies was not declared unconstitutional in principle, but in part due to the way it was defined. In particular, the tax exemption for companies was tightened and made subject to stricter requirements.

Two exciting proceedings are currently pending, which in turn affect the question of the constitutionality of the Inheritance Tax Act, which applies equally to inheritances and gifts.

In one case, the aim is to increase the tax-free allowances - which would be favourable for taxpayers. In other proceedings, the exemption of business assets is again being challenged, which is perceived as unfair.

Legal review proceedings at the request of Bavaria on the amount of tax-free allowances (1 BvF 1/23)

The inheritance tax allowances have remained unchanged since 2008. For example, they are EUR 500,000 for spouses and EUR 400,000 for children. On the other hand, inflation has risen massively during this period. Share prices and property prices have risen immensely. Since 2023, a changed valuation procedure has also applied to property valuations, which tends to lead to higher property values. Against this backdrop, the Bavarian state government initiated a standardisation procedure on 16 June 2023 with the aim of reviewing the tax-free amounts.

Constitutional complaint on corporate favours (1 BvR 804/22)

The complainants allege that the Inheritance Tax Act is unconstitutional because companies are excessively favoured as inheritance or gift assets compared to private assets. The regulations on the preferential treatment of companies can be found in Sections 13a, 13b, 13c, 19, 19a and 28a of the Inheritance Tax and Gift Tax Act 2016. The question to be clarified in the proceedings is whether these regulations disadvantage acquirers for whom no preferential treatment applies in a constitutionally objectionable manner. This applies, for example, to purchasers of money, real estate or a share deposit of a corresponding amount.

Election programmes of the parties

The election programmes contain statements on inheritance tax that already give an indication of the political mood. The increase in the tax-free amounts can be found in some programmes.

The CDU/CSU is calling for higher inheritance tax allowances and wants to allow the costs of energy-efficient refurbishments to be deducted from inheritance tax. No figures are given.

The SPD wants to increase the revenue from inheritance tax and criticises the privileged treatment of large company assets. This is to be countered with minimum taxation for large business assets and a simultaneous increase in tax-free allowances. No figures are given.

The AFD wants to abolish inheritance tax.

The Greens want a reform of inheritance tax towards a model with a personal lifetime allowance, extensive cancellation of existing exemptions for exceptionally large inheritances and generous deferral rules. No figures are given. Owner-occupied property should remain exempt.

The FDP wants to automatically increase inheritance and gift tax allowances by the rate of inflation.

The Left wants to increase the tax rates for inheritances and gifts for the "super-rich" and reduce the personal allowances to a standardised EUR 200,000 - even for non-relatives. The initial tax rate is to be 6 per cent and rise progressively to 60 per cent from a taxable inheritance of EUR 3 million. One owner-occupied property of up to 200 square metres per inheritance should be exempt from inheritance tax. It should be possible to defer inheritance tax for 20 years and also redeem it in the form of public company shares. "Loopholes" in inheritance tax are to be closed. Concessions for company assets, large residential property portfolios and, in particular, the exemption requirement test should be abolished.

The BSW makes no statement on inheritance tax, but indicates that it does not think much of the acquisition of assets through inheritance.

Options for action

The pending judgements before the Federal Constitutional Court mentioned in the article were already included in the overview of planned decisions for 2024, but it is unclear when the decisions will be handed down. In any case, a decision by the Federal Constitutional Court should be expected in 2025 as a precautionary measure. There are fears among experts that the regulations on the preferential treatment of business assets could be significantly tightened in the course of new legislation if the Federal Constitutional Court once again declares the Inheritance Tax Act (in particular the exemption of business assets) to be unconstitutional. In particular, the so-called exemption requirement test for large assets (company assets in excess of EUR 26 million) is at the centre of the discussion.

Even beyond the expected judgements, there may be a positive (increase in allowances) or negative (cancellation or tightening of preferential treatment) change to inheritance tax, depending on the outcome of the election. In any case, there is still time to transfer assets under the current inheritance tax regime before the judgement of the Federal Constitutional Court is published and politicians react to it.

Yours TAXGATE team supports wealthy private individuals and medium-sized companies in implementing tax-efficient asset transfers to the next generation. Stephan Scheffold and Markus Schenk are succession experts at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.