Germany’s Federal Constitutional Court in Karlsruhe is spending two days on inheritance tax. On Monday, 12 October 2026, it began hearing a challenge from the Bavarian state government. On Tuesday, 13 October, it hears a complaint from an heir who says the generous relief for business assets is unfair to people who inherit anything else. A ruling is expected only months later, and at the time of writing we had seen no reports from inside the courtroom.
The stakes are large. Destatis, the federal statistics office, says Germany assessed a record €21.4 billion of inheritance and gift tax in 2025. It reports separately that €3.7 billion was waived that year under a special test for the biggest business transfers. The court has found earlier versions of the tax unconstitutional three times before, in 1995, 2006 and 2014. How it rules this time will shape how German families pass on their companies.
The two cases
1 BvF 1/23, Bavaria (12 October). This is an “abstract review”: a state government asks the court to check a law without any specific tax bill in dispute. Bavaria argues that the federal government should not set inheritance tax at all, since the revenue goes to the states. It also says tax-free allowances and rates are unconstitutional because they have not kept up with prices, and that allowances should reflect regional property prices. Bavarian finance minister Albert Füracker has pointed out that allowances and rates have not changed since 2009.
1 BvR 804/22, an heir (13 October). The complainant inherited his aunt’s estate, made up only of private assets: a securities account and property. He challenged his tax bill and lost in the lower courts. He argues that the reliefs for business assets, which the court describes as ranging from a broad exemption to a full waiver, leave heirs of private wealth unfairly worse off.
How business relief works
German inheritance tax treats qualifying business assets very differently from private wealth. “Qualifying” broadly means an operating business, not cash or rented flats parked inside a company.
- Standard relief: 85% tax-free. The heir must keep the business for five years and keep the payroll above set minimums.
- Optional relief: 100% tax-free. Available if no more than 20% of the business consists of passive “administrative” assets, with stricter conditions over seven years.
- Above €26 million. For larger acquisitions of business assets, the relief shrinks step by step and disappears at €90 million, unless the heir chooses the needs test below.
The “Verschonungsbedarfsprüfung”, in plain English
The long German word means “test of the need for relief”. It sits in § 28a of the inheritance tax law and was added in 2016. An heir receiving more than €26 million of business assets can ask for the tax on those assets to be waived, if they show they cannot pay it from their “available assets”. That means half of the private assets received in the same transfer, plus half of the private assets they already own. An heir whose wealth is mostly the company itself can therefore pay little or nothing. The waiver has strings: seven years of holding and payroll conditions, and a recalculation if more private assets arrive by gift or inheritance within ten years.
What the numbers show
Destatis publishes a separate table of these waivers. We added up its figures for 2021 to 2025:
- 139 cases (10, 24, 26, 45 and 34 a year);
- €11.79 billion of tax due on the business assets in those cases;
- €11.08 billion waived, about 94%;
- about €0.71 billion left to pay.
In 2025 alone, 34 cases carried €3.95 billion of tax on business assets, and €3.70 billion of it was waived. Twenty-eight of the 34 were lifetime gifts, not inheritances.
The court has been here before
In a decision of 7 November 2006, the court found that taxing assets valued by very different methods at a single rate broke the equality principle, and gave parliament until the end of 2008 to fix it. In a judgment of 17 December 2014, it held that business relief was disproportionate where it reached beyond small and medium firms without any test of need, and set a deadline of 30 June 2016. The needs test is the result of that ruling.
The debate
Family business groups defend the relief. Rainer Kirchdörfer of the Foundation for Family Businesses told the Rheinische Post that losing it would be “a catastrophe” for Germany as a business location. Critics argue that mid-sized inheritances pay while many large business transfers barely do. In interviews with Welt am Sonntag, reported on 10 October, Clemens Fuest, president of the ifo Institute, and Marcel Fratzscher, president of the DIW, both called for ending the exemptions. Fuest suggested a low rate of around 10% with generous deferral. Fratzscher said payments should be spread so they do not eat into a firm’s substance.
Politics is split too. Finance minister Lars Klingbeil of the SPD has said Germany needs “a fairer inheritance tax” and wants to act once the court has set the frame. The CDU and CSU prefer to wait for the ruling.
A fair caveat
The waiver table counts the year a waiver was granted, which may differ from the year the tax was assessed, so it does not line up neatly with other Destatis series. The court may uphold the rules, strike some down, or give parliament a deadline. Past rulings did not end relief for business heirs; they changed its shape.
Five lessons to take away
- Relief can wipe out most of the bill. In needs-test cases from 2021 to 2025, about 94% of the tax on business assets was waived.
- Where wealth sits changes everything. The same value is taxed very differently inside an operating business and in private hands.
- Tax privileges get tested in court. This is the court’s third major inheritance tax review since 2006.
- Waivers come with conditions. Holding periods, payroll rules and a ten-year look at new wealth all apply.
- Build in flexibility. Law firm Heuking suggests revocation clauses in transfer agreements in case the rules change.
Questions to bring to your advisors
How much of our wealth counts as qualifying business assets, and how much as administrative or private assets? Would a planned transfer cross €26 million, and what would a needs test look at? What happens to our succession plan if the court tightens the rules? These are questions to bring to your lawyers and tax advisors, not advice.