The tax on inheritance is one of the hottest topics in Germany. So hot that the Federal Constitutional Court will have to hear about it next week. Many find the current regulations unfair, but how they can be improved is controversial. The first case on Monday concerns several provisions of inheritance and gift tax law. This includes, among other things, the valuation of real estate. Bavaria argues that price increases and regional differences in real estate need to be taken more into account (ref. 1 BvF 1/23).
The procedure was started by the Bavarian state government. This considers the allowances for inheritance and gifts to be too low and the taxes to be too high in view of the increased real estate prices. The amount up to which no tax has to be paid varies - depending on the degree of relationship. Widowers and widows, for example, inherit up to 500,000 euros tax-free from the deceased spouse; children are exempted up to 400,000 euros. Bavaria believes that the federal government should not make the laws here. Real estate prices vary regionally and this must be taken into account.
On Tuesday it will be about the advantages that company heirs have over other heirs. Anyone who inherits business assets usually has to pay significantly lower taxes than heirs to private assets (ref. 1 BvR 804/22).
If money is tight, no taxes
If an inherited company is continued for at least five years and the overall wages paid to employees do not fall too much, 85 percent of the inherited business assets remain tax-free. If the company is held for seven years, inheritance tax is waived entirely. Small businesses with fewer than six employees do not have to comply with the wage regulation. The idea behind it is that jobs and investments are preserved.
The process was initiated by a man who had inherited securities and real estate from his aunt and was supposed to pay around 47,000 euros in taxes on them. He unsuccessfully filed a lawsuit against the tax assessment before the tax court in Münster. He then filed a constitutional complaint to clarify whether the current rules “disadvantage him in a way that is constitutionally objectionable.”
Economists are calling for reform
In their annual report for 2025/2026, the so-called economists called for a reform of the inheritance tax “in order to ensure more even taxation of all types of assets.” To this end, “the tax incentives for business assets should be significantly reduced,” explained the Council of Experts when assessing overall economic development last year.
The Federation of German Industries (BDI), on the other hand, believes that the privileging of company assets is constitutional and serves the common good. “The preservation of companies, their investment power and the jobs associated with them is a legitimate goal,” explained the BDI a few days ago.
Reiche opposes this
In the debate about inheritance tax in Germany, leading economists are calling for an end to privileges when inheriting companies. “A reform should significantly reduce tax rates, abolish exceptions for business assets and self-used real estate and provide for deferral rules,” said the President of the Munich Ifo Institute, Clemens Fuest, to “Welt am Sonntag”. Marcel Fratzscher, President of the German Institute for Economic Research (DIW), also believes that the current special rules are no longer up to date.
Ifo boss Fuest thinks the companies' concerns are exaggerated. "A tax with a low rate in the ten percent range, combined with generous deferral regulations, is affordable," he said. No exception is necessary for owner-occupied properties either. Tax exemption is only justified for the spouse who already lives in the property.
While Fratzscher wants to use assets overall more for the state's income, Fuest primarily advocates for a fairer distribution of the burden. "Currently, medium-sized inheritances in particular are burdened with inheritance tax, while many large inheritances in the form of business assets are not burdened or only burdened slightly," said the Ifo boss.
Federal Economics Minister Katherina Reiche has rejected the calls for reform. The high proportion of family businesses in Germany is a key success factor, said the CDU politician in Berlin a few days ago. Business-related assets should therefore not be taxed so heavily that the business is given up. Reiche criticized the fact that the debate often fails to distinguish between company-tied assets and free capital, which leads to an “unpleasant debate about envy.”
