Constitutional Court hears Bavaria's suit and business-heir tax breaks in inheritance tax case

Two cases before the court

The Federal Constitutional Court in Karlsruhe is hearing two proceedings on inheritance tax this week. The first, which opened on Monday, 12 October, is a suit by the Bavarian state government (file 1 BvF 1/23) seeking partial regionalisation of the tax and higher allowances. The second, due on Tuesday, 13 October, is a constitutional complaint against the tax privileges for business assets. Both concern a tax that flows entirely to the states but whose allowances and rates the federal government sets for all of them. Frankfurter Allgemeine reports that the rulings could bring fundamental changes to the law, for which there is no political majority yet.

Bavaria's suit over allowances

Presiding judge Stephan Harbarth said the case raises basic questions about how inheritances are taxed in a federal system, with rising and regionally uneven property prices as the background. Bavaria's finance minister Albert Füracker (CSU) argued before the First Senate that the suit is an "ultima ratio" in the interest of tax fairness. Füracker said the states must be free to decide on personal allowances and rates.

Then every state can design it the way it fits.

The Bavarian filing says property prices in the state have doubled and tripled in many places, so allowances often no longer let children inherit the family home tax-free, and some must sell it to pay the tax. Marcus Söder had pursued a regional solution politically but found no majority in the Bundesrat. Michael Schrodi (SPD), parliamentary state secretary at the federal finance ministry, told the court that the federal rules must stay uniform, warning that regionalisation would fragment the law and lead to "ruinous tax competition".

Privileges for business assets

The Tuesday complaint concerns the tax relief for business assets. Under current rules, 85 percent of business assets up to 26 million euros stay tax-free if the company and its payroll are maintained, and 100 percent is possible under some conditions, provided jobs are kept for five or seven years. Above 26 million euros, the so-called Verschonungsbedarfsprüfung waives the tax on request if the heir can show they cannot pay it from private assets. Finance ministry papers prepared for the court count about 275,000 inheritances and gifts last year, of which 29,000 involved business assets under 26 million euros and 34 involved larger ones. In those 34 cases, 3.7 billion of the 3.95 billion euros assessed was waived, and 2.37 billion of that fell on Bavaria. The waived volume has grown for years, from 1.4 billion euros in 2022.

Handelsblatt names the lobby group Netzwerk Steuergerechtigkeit and the Sachverständigenrat für Wirtschaft among critics who see the rules as unfair. Supporters of the tax warn that the relief can keep family firms running, while critics argue that wealth is taxed only once and is often already taxed.

Family businesses and private heirs

Caroline Trips, 59, runs Trips GmbH in Grafenrheinfeld with her brother and is also president of the Industrie- und Handelskammer Würzburg-Schweinfurt. Her company is preparing a handover to the next generation. Without the relief, she said, "extreme taxes" would apply, and successors would need loans that cut room for investment.

That is the worst thing that can happen to an entrepreneur. To remain competitive, I have to keep investing.

For most families the general rules are far gentler. More than 80 percent of inheritances in Germany pay no tax, because spouses receive allowances of up to 500,000 euros, children 400,000 euros and grandchildren 200,000 euros. Siblings, nephews, friends and unmarried partners pay on amounts from 20,000 euros, and rates on sums above allowances run from 7 to 50 percent. N-tv describes the case of an heir who paid 47,000 euros in inheritance tax on private assets from his aunt's estate and filed a constitutional complaint, calling the burden unfair next to the relief for business assets. Total inheritance and gift tax assessed in 2025 reached 13.3 billion euros, about 57 percent more than in the previous year.

What comes next

The articles give no date for a ruling. RP Online's commentary urges the federal government to wait for the court's decision before acting. An inheritance tax reform is among the coalition's projects for next year, and Handelsblatt's morning briefing notes that Union and SPD were already occupied with personnel questions this week. Both proceedings concern the same tax that the coalition would have to reform.